UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 3, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34757
Spectrum Brands Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-2166630 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
601 Rayovac Drive Madison, Wisconsin |
53711 | |
(Address of principal executive offices) | (Zip Code) |
(608) 275-3340
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report.)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the Registrants common stock, $.01 par value, as of May 09, 2011, was 50,935,710.
SPECTRUM BRANDS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED April 3, 2011
INDEX
Page | ||||||
Part IFinancial Information | ||||||
Item 1. |
3 | |||||
3 | ||||||
4 | ||||||
5 | ||||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
6 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
34 | ||||
Item 3. |
49 | |||||
Item 4. |
50 | |||||
Part IIOther Information | ||||||
Item 1. |
51 | |||||
Item 1A. |
52 | |||||
Item 2. |
69 | |||||
Item 6. |
69 | |||||
70 |
2
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Financial Position
April 3, 2011 and September 30, 2010
(Unaudited)
(Amounts in thousands, except per share figures)
April 3, 2011 | September 30, 2010 | |||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 73,091 | $ | 170,614 | ||||
Receivables: |
||||||||
Trade accounts receivable, net of allowances of $3,884 and $4,351, respectively |
362,723 | 365,002 | ||||||
Other |
50,979 | 41,445 | ||||||
Inventories |
561,043 | 530,342 | ||||||
Deferred income taxes |
28,866 | 35,735 | ||||||
Prepaid expenses and other |
57,011 | 56,574 | ||||||
Total current assets |
1,133,713 | 1,199,712 | ||||||
Property, plant and equipment, net |
201,917 | 201,164 | ||||||
Deferred charges and other |
45,138 | 46,352 | ||||||
Goodwill |
617,724 | 600,055 | ||||||
Intangible assets, net |
1,757,330 | 1,769,360 | ||||||
Debt issuance costs |
45,478 | 56,961 | ||||||
Total assets |
$ | 3,801,300 | $ | 3,873,604 | ||||
Liabilities and Shareholders Equity | ||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 31,841 | $ | 20,710 | ||||
Accounts payable |
252,719 | 332,231 | ||||||
Accrued liabilities: |
||||||||
Wages and benefits |
53,668 | 93,971 | ||||||
Income taxes payable |
43,819 | 37,118 | ||||||
Restructuring and related charges |
18,341 | 23,793 | ||||||
Accrued interest |
29,015 | 31,652 | ||||||
Other |
113,175 | 123,297 | ||||||
Total current liabilities |
542,578 | 662,772 | ||||||
Long-term debt, net of current maturities |
1,793,259 | 1,723,057 | ||||||
Employee benefit obligations, net of current portion |
92,730 | 92,725 | ||||||
Deferred income taxes |
304,430 | 277,843 | ||||||
Other |
63,670 | 70,828 | ||||||
Total liabilities |
2,796,667 | 2,827,225 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock, $.01 par value, authorized 200,000 shares; issued 51,163 and 51,101 shares, respectively; outstanding 50,964 and 51,020 shares |
512 | 514 | ||||||
Additional paid-in capital |
1,330,014 | 1,316,461 | ||||||
Accumulated deficit |
(330,828 | ) | (260,892 | ) | ||||
Accumulated other comprehensive income (loss) |
10,384 | (7,497 | ) | |||||
1,010,082 | 1,048,586 | |||||||
Less treasury stock, at cost, 199 and 81 shares, respectively |
(5,449 | ) | (2,207 | ) | ||||
Total shareholders equity |
1,004,633 | 1,046,379 | ||||||
Total liabilities and shareholders equity |
$ | 3,801,300 | $ | 3,873,604 | ||||
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
3
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Operations
For the three and six month periods ended April 3, 2011 and April 4, 2010
(Unaudited)
(Amounts in thousands, except per share figures)
THREE MONTHS | SIX MONTHS | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 693,885 | $ | 532,586 | $ | 1,554,952 | $ | 1,124,526 | ||||||||
Cost of goods sold |
436,393 | 321,017 | 997,627 | 726,844 | ||||||||||||
Restructuring and related charges |
2,053 | 1,989 | 2,647 | 3,640 | ||||||||||||
Gross profit |
255,439 | 209,580 | 554,678 | 394,042 | ||||||||||||
Selling |
130,362 | 104,163 | 270,582 | 215,452 | ||||||||||||
General and administrative |
58,508 | 45,382 | 119,265 | 86,144 | ||||||||||||
Research and development |
8,798 | 7,823 | 16,365 | 14,268 | ||||||||||||
Acquisition and integration related charges |
7,588 | 3,039 | 24,043 | 5,470 | ||||||||||||
Restructuring and related charges |
3,094 | 3,402 | 8,065 | 8,178 | ||||||||||||
Total operating expenses |
208,350 | 163,809 | 438,320 | 329,512 | ||||||||||||
Operating income |
47,089 | 45,771 | 116,358 | 64,530 | ||||||||||||
Interest expense |
72,431 | 48,410 | 125,525 | 97,892 | ||||||||||||
Other (income) expense, net |
(287 | ) | 6,338 | 602 | 6,984 | |||||||||||
Loss from continuing operations before reorganization items and income taxes |
(25,055 | ) | (8,977 | ) | (9,769 | ) | (40,346 | ) | ||||||||
Reorganization items expense, net |
| | | 3,646 | ||||||||||||
Loss from continuing operations before income taxes |
(25,055 | ) | (8,977 | ) | (9,769 | ) | (43,992 | ) | ||||||||
Income tax expense |
25,131 | 10,057 | 60,174 | 32,556 | ||||||||||||
Loss from continuing operations |
(50,186 | ) | (19,034 | ) | (69,943 | ) | (76,548 | ) | ||||||||
Loss from discontinued operations, net of tax |
| | | (2,735 | ) | |||||||||||
Net loss |
$ | (50,186 | ) | $ | (19,034 | ) | $ | (69,943 | ) | $ | (79,283 | ) | ||||
Basic earnings per share: |
||||||||||||||||
Weighted average shares of common stock outstanding |
50,817 | 30,000 | 50,804 | 30,000 | ||||||||||||
Loss from continuing operations |
$ | (0.99 | ) | $ | (0.63 | ) | $ | (1.38 | ) | $ | (2.55 | ) | ||||
Loss from discontinued operations |
| | | (0.09 | ) | |||||||||||
Net loss |
$ | (0.99 | ) | $ | (0.63 | ) | $ | (1.38 | ) | $ | (2.64 | ) | ||||
Diluted earnings per share: |
||||||||||||||||
Weighted average shares and equivalents outstanding |
50,817 | 30,000 | 50,804 | 30,000 | ||||||||||||
Loss from continuing operations |
$ | (0.99 | ) | $ | (0.63 | ) | $ | (1.38 | ) | $ | (2.55 | ) | ||||
Loss from discontinued operations |
| | | (0.09 | ) | |||||||||||
Net loss |
$ | (0.99 | ) | $ | (0.63 | ) | $ | (1.38 | ) | $ | (2.64 | ) | ||||
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
4
SPECTRUM BRANDS HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
For the six month periods ended April 3, 2011 and April 4, 2010
(Unaudited)
(Amounts in thousands)
SIX MONTHS | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (69,943 | ) | $ | (79,283 | ) | ||
Loss from discontinued operations |
| (2,735 | ) | |||||
Loss from continuing operations |
(69,943 | ) | (76,548 | ) | ||||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Depreciation |
23,315 | 25,244 | ||||||
Amortization of intangibles |
28,634 | 20,864 | ||||||
Amortization of unearned restricted stock compensation |
14,287 | 6,393 | ||||||
Amortization of debt issuance costs |
6,557 | 1,839 | ||||||
Administrative related reorganization items |
| 3,646 | ||||||
Payments for administrative related reorganization items |
| (45,782 | ) | |||||
Non-cash increase to cost of goods sold due to fresh-start reporting inventory valuation |
| 34,494 | ||||||
Non-cash interest expense on 12% Notes |
| 13,383 | ||||||
Non-cash debt accretion |
3,001 | 12,246 | ||||||
Write off of unamortized discount on retired debt |
8,950 | | ||||||
Write off of debt issuance costs |
15,420 | | ||||||
Other non-cash adjustments |
5,630 | 7,474 | ||||||
Net changes in assets and liabilities, net of discontinued operations |
(158,567 | ) | (74,967 | ) | ||||
Net cash used by operating activities of continuing operations |
(122,716 | ) | (71,714 | ) | ||||
Net cash used by operating activities of discontinued operations |
(259 | ) | (9,290 | ) | ||||
Net cash used by operating activities |
(122,975 | ) | (81,004 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(18,712 | ) | (10,843 | ) | ||||
Proceeds from sale of property, plant and equipment |
131 | 208 | ||||||
Acquisition, net of cash |
(10,278 | ) | | |||||
Proceeds from sale of Assets Held for Sale - Ningbo |
6,997 | | ||||||
Other investing activity |
(1,530 | ) | | |||||
Net cash used by investing activities of continuing operations |
(23,392 | ) | (10,635 | ) | ||||
Cash flows from financing activities: |
||||||||
Debt issuance costs |
(8,648 | ) | (2,950 | ) | ||||
Prepayment of Term Debt |
(6,800 | ) | | |||||
Proceeds from debt financing |
22,496 | 27,820 | ||||||
Reduction of debt |
(367 | ) | (8,096 | ) | ||||
ABL Revolving Credit Facility, net |
118,000 | 38,867 | ||||||
Refund of debt issuance costs |
| 204 | ||||||
Payments of Senior Credit Facilities |
(71,700 | ) | | |||||
Treasury stock purchases |
(3,241 | ) | | |||||
Net cash provided by financing activities |
49,740 | 55,845 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(896 | ) | (880 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation |
| (5,640 | ) | |||||
Net decrease in cash and cash equivalents |
(97,523 | ) | (42,314 | ) | ||||
Cash and cash equivalents, beginning of period |
170,614 | 97,800 | ||||||
Cash and cash equivalents, end of period |
$ | 73,091 | $ | 55,486 | ||||
See accompanying notes which are an integral part of these condensed consolidated financial statements
(Unaudited).
5
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands, except per share figures)
1 | DESCRIPTION OF BUSINESS |
Spectrum Brands Holdings, Inc., a Delaware corporation (SB Holdings or the Company), is a global branded consumer products company and was created in connection with the combination of Spectrum Brands, Inc. (Spectrum Brands), a global branded consumer products company, and Russell Hobbs, Inc. (Russell Hobbs), a global branded small appliance company, to form a new combined company (the Merger). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs are wholly-owned subsidiaries of SB Holdings and Russell Hobbs is a wholly-owned subsidiary of Spectrum Brands. SB Holdings trades on the New York Stock Exchange under the symbol SPB.
In connection with the Merger, Spectrum Brands refinanced its existing senior debt, except for Spectrum Brands 12% Senior Subordinated Toggle Notes due 2019 (the 12% Notes), which remain outstanding, and a portion of Russell Hobbs existing senior debt through a combination of a new $750,000 United States (U.S.) dollar term loan due June 16, 2016 (the Term Loan), new $750,000 9.5% Senior Secured Notes maturing June 15, 2018 (the 9.5% Notes) and a new $300,000 ABL revolving facility due June 16, 2014 (the ABL Revolving Credit Facility). The Term Loan was subsequently refinanced in February 2011, and the ABL Revolving Credit Facility was amended in April 2011. (See also Note 7, Debt, for a more complete discussion of the Companys outstanding debt.)
On February 3, 2009, Spectrum Brands, at the time a Wisconsin corporation, and each of its wholly owned U.S. subsidiaries (collectively, the Debtors) filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code), in the U.S. Bankruptcy Court for the Western District of Texas (the Bankruptcy Court). On August 28, 2009 (the Effective Date), the Debtors emerged from Chapter 11 of the Bankruptcy Code. As of the Effective Date and pursuant to the Debtors confirmed plan of reorganization, Spectrum Brands converted from a Wisconsin corporation to a Delaware corporation. Prior to and including August 30, 2009, all operations of the business resulted from the operations of the Predecessor Company (as defined below). In accordance with Accounting Standard Codification (ASC) Topic 852: Reorganizations, the Company determined that all conditions required for the adoption of fresh-start reporting were met upon emergence from Chapter 11 of the Bankruptcy Code on the Effective Date. However in light of the proximity of that date to the Companys August accounting period close, which was August 30, 2009, the Company elected to adopt a convenience date of August 30, 2009 for recording fresh-start reporting.
Unless the context indicates otherwise, the term Company is used to refer to both Spectrum Brands and its subsidiaries prior to the Merger and SB Holdings and its subsidiaries subsequent to the Merger. The term Predecessor Company refers only to the Company prior to the Effective Date and the term Successor Company refers to Spectrum Brands or the Company subsequent to the Effective Date.
The Company is a diversified global branded consumer products company with positions in seven major product categories: consumer batteries; small appliances; pet supplies; electric shaving and grooming; electric personal care; portable lighting; and home and garden control.
Effective October 1, 2010, the Companys chief operating decision-maker decided to manage the businesses of the Company in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of the Companys worldwide battery, electric shaving and grooming, electric personal care, portable lighting business and small appliances primarily in the kitchen and home product categories (Global Batteries & Appliances); (ii) Global Pet Supplies, which consists of the Companys worldwide pet supplies business (Global Pet Supplies); and (iii) Home and Garden Business, which consists of the Companys home and garden and insect control business (the Home and Garden Business). The current reporting segment structure reflects the combination of the former Global Batteries & Personal Care segment (Global Batteries & Personal Care), which consisted of the worldwide battery, electric shaving and grooming, electric personal care and portable lighting business, with substantially all of the former Small Appliances segment (Small Appliances), which consisted of the Russell Hobbs business acquired on June 16, 2010, to form the Global Batteries & Appliances segment. In addition, certain pest control and pet products included in the former Small Appliances segment have been reclassified into the Home and Garden Business and Global Pet Supplies segments, respectively. The presentation of all historical segment reporting herein has been changed to conform to this segment reporting.
6
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
The Companys operations include the worldwide manufacturing and marketing of alkaline, zinc carbon and hearing aid batteries, as well as aquariums and aquatic health supplies and the designing and marketing of rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. The Companys operations also include the manufacturing and marketing of specialty pet supplies. The Company also manufactures and markets herbicides, insecticides and insect repellents in North America. The Company also designs, markets and distributes a broad range of branded small appliances and personal care products. The Companys operations utilize manufacturing and product development facilities located in the U.S., Europe, Asia and Latin America.
The Company sells its products in approximately 120 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers and enjoys name recognition in its markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Tetra, 8-in-1, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware and various other brands.
2 | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation: These condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and, in the opinion of the Company, include all adjustments (which are normal and recurring in nature) necessary to present fairly the financial position of the Company at April 3, 2011 and September 30, 2010, and the results of operations for the three and six month periods ended April 3, 2011 and April 4, 2010 and the cash flows for the six month periods ended April 3, 2011 and April 4, 2010. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) have been condensed or omitted pursuant to such SEC rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2010. Certain prior period amounts have been reclassified to conform to the current period presentation.
Significant Accounting Policies and Practices: The condensed consolidated financial statements include the condensed consolidated financial statements of SB Holdings and its subsidiaries and are prepared in accordance with GAAP. All intercompany transactions have been eliminated.
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Discontinued Operations: On November 11, 2008, the Predecessor Companys board of directors approved the shutdown of the growing products portion of the Home and Garden Business, which included the manufacturing and marketing of fertilizers, enriched soils, mulch and grass seed. The decision to shutdown the growing products portion of the Home and Garden Business was made only after the Predecessor Company was unable to successfully sell this business, in whole or in part. The shutdown of the growing products portion of the Home and Garden Business was completed during the second quarter of the Companys fiscal year ended September 30, 2009.
The presentation herein of the results of continuing operations excludes the growing products portion of the Home and Garden Business for all periods presented. The following amounts have been segregated from continuing operations and are reflected as discontinued operations for the six month period ended April 4, 2010:
2010 | ||||
Net sales |
$ | | ||
Loss from discontinued operations before income taxes |
$ | (2,512 | ) | |
Provision for income tax expense |
223 | |||
Loss from discontinued operations, net of tax |
$ | (2,735 | ) | |
Intangible Assets: Intangible assets are recorded at cost or at fair value if acquired in a purchase business combination. Customer relationships and proprietary technology intangibles are amortized, using the straight-line method, over their estimated useful lives of approximately 4 to 20 years. Excess of cost over fair value of net assets acquired (goodwill) and trade name intangibles
7
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
are not amortized. Goodwill is tested for impairment at least annually at the reporting unit level, with such groupings being consistent with the Companys reportable segments. If an impairment is indicated, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Trade name intangibles are tested for impairment at least annually by comparing the fair value with the carrying value. Any excess of carrying value over fair value is recognized as an impairment loss in income from operations. The Companys annual impairment testing is completed at the August financial period end. ASC Topic 350: Intangibles-Goodwill and Other, requires that goodwill and indefinite-lived intangible assets be tested for impairment annually, or more often if an event or circumstance indicates that an impairment loss may have been incurred. Management uses its judgment in assessing whether assets may have become impaired between annual impairment tests. Indicators such as unexpected adverse business conditions, economic factors, unanticipated technological change or competitive activities, loss of key personnel, and acts by governments and courts may signal that an asset has become impaired.
The Companys goodwill and indefinite lived trade name intangibles were tested in conjunction with the Companys realignment of reportable segments on October 1, 2010. The Company concluded that the fair values of its reporting units, which are the same as the Companys reporting segments, and indefinite lived trade name intangible assets were in excess of the carrying amounts of those assets, under both the Companys prior reportable segment structure and the current reportable segment structure, and, accordingly, no impairment of goodwill or indefinite lived trade name intangibles was recorded.
Shipping and Handling Costs: The Company incurred shipping and handling costs of $47,698 and $98,968 for the three and six month periods ended April 3, 2011, respectively, and $34,950 and $71,411 for the three and six month periods ended April 4, 2010, respectively. These costs are included in Selling expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited). Shipping and handling costs include costs incurred with third-party carriers to transport products to customers as well as salaries and overhead costs related to activities to prepare the Companys products for shipment from its distribution facilities.
Concentrations of Credit Risk: Trade receivables subject the Company to credit risk. Trade accounts receivable are carried at net realizable value. The Company extends credit to its customers based upon an evaluation of the customers financial condition and credit history, and generally does not require collateral. The Company monitors its customers credit and financial condition based on changing economic conditions and makes adjustments to credit policies as required. Provision for losses on uncollectible trade receivables are determined principally on the basis of past collection experience applied to ongoing evaluations of the Companys receivables and evaluations of the risks of nonpayment for a given customer.
The Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represented approximately 22% and 23% of the Companys Net sales during the three and six month periods ended April 3, 2011, respectively. This customer represented approximately 22% and 21% of the Companys Net sales during the three and six month periods ended April 4, 2010, respectively. This customer also represented approximately 14% and 15% of the Companys Trade accounts receivable, net at April 3, 2011 and September 30, 2010, respectively.
Approximately 44% and 47% of the Companys Net sales during the three and six month periods ended April 3, 2011, respectively, and 43% and 47% of the Companys Net sales during the three and six month periods ended April 4, 2010, respectively, occurred outside the U.S. These sales and related receivables are subject to varying degrees of credit, currency, political and economic risk. The Company monitors these risks and makes appropriate provisions for collectibility based on an assessment of the risks present.
Stock-Based Compensation: On the Effective Date all of the existing common stock of the Predecessor Company was extinguished and deemed cancelled, including restricted stock and other stock-based awards.
In September 2009, the Successor Companys board of directors (the Board) adopted the 2009 Spectrum Brands Inc. Incentive Plan (the 2009 Plan). In conjunction with the Merger, the 2009 Plan was assumed by SB Holdings. Up to 3,333 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2009 Plan. After October 21, 2010, no further awards may be made under the 2009 Plan (as described in further detail below) as the Spectrum Brands Holdings, Inc. 2011 Omnibus Equity Award Plan (the 2011 Plan) was approved by the shareholders of the Company on March 1, 2011.
In conjunction with the Merger, the Company assumed the Spectrum Brands Holdings, Inc. 2007 Omnibus Equity Award Plan (formerly known as the Russell Hobbs, Inc. 2007 Omnibus Equity Award Plan, as amended on June 24, 2008) (the 2007 RH Plan). Up to 600 shares of common stock, net of forfeitures and cancellations, could have been issued under the 2007 RH Plan. After October 21, 2010, no further awards may be made under the 2007 RH Plan (as described in further detail below) as the 2011 Plan was approved by the shareholders of the Company on March 1, 2011.
8
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
On October 21, 2010, the Board adopted the 2011 Plan, which received shareholder approval at the Annual Meeting of the shareholders of the Company held on March 1, 2011. Upon such shareholder approval, no further awards will be granted under the 2009 Plan and the 2007 RH Plan. 4,626 shares of common stock of the Company, net of cancellations, may be issued under the 2011 Plan.
Under ASC Topic 718: Compensation-Stock Compensation, the Company is required to recognize expense related to its stock-based plans based on the fair value of its employee stock awards.
Total stock compensation expense associated with restricted stock awards and restricted stock units recognized by the Company during the three and six month periods ended April 3, 2011 was $8,674, or $5,638, net of taxes, and $14,287, or $9,287, net of taxes, respectively. Total stock compensation expense associated with restricted stock awards recognized by the Company during the three and six month periods ended April 4, 2010 was $3,197 or $2,078, net of taxes and $6,393, or $4,155, net of taxes, respectively.
The Company granted approximately 629 shares of restricted stock awards during the six month period ended April 4, 2010. Of these grants, 18 shares are time-based and vest after a one year period and 611 shares are time-based and vest over a two year period. All vesting dates are subject to the recipients continued employment with the Company, except as otherwise permitted by the Board or in certain cases if the employee is terminated without cause. The total market value of the restricted stock awards on the date of grant was approximately $14,555.
The Company granted approximately 157 and 1,580 restricted stock units during the three and six month periods ended April 3, 2011, respectively. Of these grants, 15 restricted stock units are time-based and vest over a one year period and 18 restricted stock units are time-based and vest over a three year period. The remaining 1,547 restricted stock units are performance and time-based with 665 units vesting over a two year period and 882 units vesting over a three year period. The total market value of the restricted stock units on the dates of the grants was approximately $46,034.
The fair value of restricted stock awards and restricted stock units is determined based on the market price of the Companys shares of common stock on the grant date. A summary of the status of the Companys non-vested restricted stock awards and restricted stock units as of April 3, 2011 is as follows:
Restricted Stock Awards |
Shares | Weighted Average Grant Date Fair Value |
Fair Value | |||||||||
Restricted stock awards at September 30, 2010 |
446 | $ | 23.56 | $ | 10,508 | |||||||
Vested |
(310 | ) | 23.12 | (7,166 | ) | |||||||
Restricted stock awards at April 3, 2011 |
136 | $ | 24.57 | $ | 3,342 | |||||||
Restricted Stock Units |
Shares | Weighted Average Grant Date Fair Value |
Fair Value | |||||||||
Restricted stock units at September 30, 2010 |
249 | $ | 28.22 | $ | 7,028 | |||||||
Granted |
1,580 | 29.14 | 46,034 | |||||||||
Forfeited |
(10 | ) | 28.80 | (288 | ) | |||||||
Vested |
(65 | ) | 28.83 | (1,874 | ) | |||||||
Restricted stock units at April 3, 2011 |
1,754 | $ | 29.02 | $ | 50,900 | |||||||
9
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Reorganization Items: In accordance with ASC Topic 852: Reorganizations, reorganization items are presented separately in the accompanying Condensed Consolidated Statements of Operations (Unaudited) and represent expenses, income, gains and losses that the Company has identified as directly relating to its voluntary petitions under Chapter 11 of the Bankruptcy Code. See Note 2, Voluntary Reorganization Under Chapter 11 in the Companys Annual Report on Form 10-K for the fiscal year ended September 30, 2010 for additional information regarding the Chapter 11 filing and subsequent emergence. Reorganization items expense, net for the six month period ended April 4, 2010 is summarized as follows:
2010 | ||||
Legal and professional fees |
$ | 3,536 | ||
Provision for rejected leases |
110 | |||
Reorganization items expense, net |
$ | 3,646 | ||
Acquisition and Integration Related Charges: Acquisition and integration related charges reflected in Operating expenses in the accompanying Condensed Consolidated Statements of Operations (Unaudited) include, but are not limited to, transaction costs such as banking, legal and accounting professional fees directly related to the acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses associated with the Companys acquisitions.
Acquisition and integration related charges associated with the Merger incurred by the Company during the three and six month periods ended April 3, 2011 and April 4, 2010 are summarized as follows:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Legal and professional fees |
$ | 1,193 | $ | 3,039 | $ | 3,589 | $ | 5,470 | ||||||||
Employee termination charges |
1,144 | | 4,896 | | ||||||||||||
Integration costs |
5,241 | | 15,370 | | ||||||||||||
Total Acquisition and integration related charges |
$ | 7,578 | $ | 3,039 | $ | 23,855 | $ | 5,470 | ||||||||
Additionally, the Company incurred $10 and $188 of legal and professional fees associated with the acquisition of Seed Resources, LLC (Seed Resources) during the three and six month periods ended April 3, 2011. (See Note 15, Acquisitions for information on the Seed Resources acquisition.)
3 | OTHER COMPREHENSIVE LOSS |
Comprehensive loss and the components of other comprehensive loss, net of tax, for the three and six month periods ended April 3, 2011 and April 4, 2010 are as follows:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (50,186 | ) | $ | (19,034 | ) | $ | (69,943 | ) | $ | (79,283 | ) | ||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation |
23,944 | (5,321 | ) | 19,870 | (6,436 | ) | ||||||||||
Valuation allowance adjustments |
433 | (2,022 | ) | 1,076 | (3,121 | ) | ||||||||||
Pension liability adjustments |
| (52 | ) | | (52 | ) | ||||||||||
Net unrealized loss on derivative instruments |
(7,244 | ) | (2,194 | ) | (3,065 | ) | (3,398 | ) | ||||||||
Net change to derive comprehensive loss for the period |
17,133 | (9,589 | ) | 17,881 | (13,007 | ) | ||||||||||
Comprehensive loss |
$ | (33,053 | ) | $ | (28,623 | ) | $ | (52,062 | ) | $ | (92,290 | ) | ||||
Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated in the Accumulated other comprehensive income (AOCI) section of Shareholders equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.
The changes in accumulated foreign currency translation for the three and six month periods ended April 3, 2011 and April 4, 2010 were primarily attributable to the impact of translation of the net assets of the Companys European operations, primarily denominated in Euros and Pounds Sterling.
10
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
4 | NET LOSS PER COMMON SHARE |
Net loss per common share of the common stock of the Company for the three and six month periods ended April 3, 2011 and April 4, 2010 is calculated based upon the following number of shares:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic |
50,817 | 30,000 | 50,804 | 30,000 | ||||||||||||
Effect of common stock equivalents |
| | | | ||||||||||||
Diluted |
50,817 | 30,000 | 50,804 | 30,000 | ||||||||||||
For the three and six month periods ended April 3, 2011 and April 4, 2010 the Company has not assumed the exercise of common stock equivalents as the impact would be antidilutive.
5 | INVENTORIES |
Inventories for the Company, which are stated at the lower of cost or market, consist of the following:
April 3, 2011 |
September 30, 2010 |
|||||||
Raw materials |
$ | 74,786 | $ | 62,857 | ||||
Work-in-process |
31,879 | 28,239 | ||||||
Finished goods |
454,378 | 439,246 | ||||||
$ | 561,043 | $ | 530,342 | |||||
6 | GOODWILL AND INTANGIBLE ASSETS |
Goodwill and intangible assets for the Company consist of the following:
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Total | |||||||||||||
Goodwill: |
||||||||||||||||
Balance at September 30, 2010 |
$ | 268,420 | $ | 159,985 | $ | 171,650 | $ | 600,055 | ||||||||
Additions |
| 10,029 | | 10,029 | ||||||||||||
Effect of translation |
5,808 | 1,832 | | 7,640 | ||||||||||||
Balance at April 3, 2011 |
$ | 274,228 | $ | 171,846 | $ | 171,650 | $ | 617,724 | ||||||||
Intangible Assets: |
||||||||||||||||
Trade names Not Subject to Amortization |
||||||||||||||||
Balance at September 30, 2010 |
$ | 569,945 | $ | 211,533 | $ | 76,000 | $ | 857,478 | ||||||||
Additions |
| 2,630 | | 2,630 | ||||||||||||
Effect of translation |
3,551 | 3,825 | | 7,376 | ||||||||||||
Balance at April 3, 2011 |
$ | 573,496 | $ | 217,988 | $ | 76,000 | $ | 867,484 | ||||||||
Intangible Assets Subject to Amortization |
||||||||||||||||
Balance at September 30, 2010, net |
$ | 516,324 | $ | 230,248 | $ | 165,310 | $ | 911,882 | ||||||||
Amortization during period |
(16,522 | ) | (7,651 | ) | (4,461 | ) | (28,634 | ) | ||||||||
Effect of translation |
4,393 | 2,205 | | 6,598 | ||||||||||||
Balance at April 3, 2011, net |
$ | 504,195 | $ | 224,802 | $ | 160,849 | $ | 889,846 | ||||||||
Total Intangible Assets, net at April 3, 2011 |
$ | 1,077,691 | $ | 442,790 | $ | 236,849 | $ | 1,757,330 | ||||||||
Intangible assets subject to amortization include proprietary technology, customer relationships and certain trade names. The carrying value of technology assets was $57,497, net of accumulated amortization of $10,117 at April 3, 2011 and $60,792, net of accumulated amortization of $6,305 at September 30, 2010. Trade names subject to amortization relate to the valuation under fresh-start reporting and the Merger. The carrying value of these trade names was $139,659, net of accumulated amortization of $10,041 at
11
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
April 3, 2011 and $145,939, net of accumulated amortization of $3,750 at September 30, 2010. Remaining intangible assets subject to amortization include customer relationship intangibles. The carrying value of customer relationships was $692,690, net of accumulated amortization of $59,013 at April 3, 2011 and $705,151, net of accumulated amortization of $35,865 at September 30, 2010. The useful life of the Companys intangible assets subject to amortization are 8 years for technology assets related to the Global Pet Supplies segment, 9 to 17 years for technology assets associated with the Global Batteries & Appliances segment, 15 to 20 years for customer relationships of the Global Batteries & Appliances segment, 20 years for customer relationships of the Home and Garden Business and Global Pet Supplies segments, 12 years for a trade name within the Global Batteries & Appliances segment and 4 years for a trade name within the Home and Garden Business segment.
Amortization expense for the three and six month periods ended April 3, 2011 and April 4, 2010 is as follows:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Proprietary technology amortization |
$ | 1,649 | $ | 1,547 | $ | 3,297 | $ | 3,092 | ||||||||
Customer relationships amortization |
9,526 | 8,918 | 19,058 | 17,709 | ||||||||||||
Trade names amortization |
3,140 | 32 | 6,279 | 63 | ||||||||||||
$ | 14,315 | $ | 10,497 | $ | 28,634 | $ | 20,864 | |||||||||
The Company estimates annual amortization expense for the next five fiscal years will approximate $55,630 per year.
7 | DEBT |
Debt consists of the following:
April 3, 2011 | September 30, 2010 | |||||||||||||||
Amount | Rate | Amount | Rate | |||||||||||||
Term Loan, U.S. Dollar, expiring June 17, 2016 |
$ | 678,300 | 5.1 | % | $ | 750,000 | 8.1 | % | ||||||||
9.5% Notes, due June 15, 2018 |
750,000 | 9.5 | % | 750,000 | 9.5 | % | ||||||||||
12% Notes, due August 28, 2019 |
245,031 | 12.0 | % | 245,031 | 12.0 | % | ||||||||||
ABL Revolving Credit Facility, expiring June 16, 2014 |
118,000 | 4.5 | % | | 4.1 | % | ||||||||||
Other notes and obligations |
36,623 | 14.1 | % | 13,605 | 10.8 | % | ||||||||||
Capitalized lease obligations |
11,819 | 5.2 | % | 11,755 | 5.2 | % | ||||||||||
1,839,773 | 1,770,391 | |||||||||||||||
Original issuance discounts on debt |
(14,673 | ) | (26,624 | ) | ||||||||||||
Less current maturities |
31,841 | 20,710 | ||||||||||||||
Long-term debt |
$ | 1,793,259 | $ | 1,723,057 | ||||||||||||
In connection with the Merger, Spectrum Brands (i) entered into a new senior secured term loan pursuant to a new senior credit agreement (the Senior Credit Agreement) consisting of the Term Loan, (ii) issued $750,000 of 9.5% Notes and (iii) entered into a $300,000 ABL Revolving Credit Facility. The proceeds from such financings were used to repay Spectrum Brands then-existing senior term credit facility (the Prior Term Facility) and Spectrum Brands then-existing asset based revolving loan facility, to pay fees and expenses in connection with the refinancing and for general corporate purposes.
The 9.5% Notes and 12% Notes were issued by Spectrum Brands. SB/RH Holdings, LLC, a wholly-owned subsidiary of SB Holdings, and the wholly owned domestic subsidiaries of Spectrum Brands are the guarantors under the 9.5% Notes. The wholly owned domestic subsidiaries of Spectrum Brands are the guarantors under the 12% Notes. SB Holdings is not an issuer or guarantor of the 9.5% Notes or the 12% Notes. SB Holdings is also not a borrower or guarantor under the Companys Term Loan or the ABL Revolving Credit Facility. Spectrum Brands is the borrower under the Term Loan and its wholly owned domestic subsidiaries along with SB/RH Holdings, LLC are the guarantors under that facility. Spectrum Brands and its wholly owned domestic subsidiaries are the borrowers under the ABL Revolving Credit Facility and SB/RH Holdings, LLC is a guarantor of that facility.
12
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Senior Term Credit Facility
On February 1, 2011, the Company completed the refinancing of its Term Loan, which had an aggregate amount outstanding of $680,000, with an Amended and Restated Credit Agreement (the New Term Loan, together with the amended ABL Revolving Credit Facility, the Senior Credit Facilities) at a lower interest rate.
The New Term Loan was issued at par with a maturity date of June 17, 2016. Subject to certain mandatory prepayment events, the Term Loan is subject to repayment according to a scheduled amortization, with the final payment of all amounts outstanding, plus accrued and unpaid interest, due at maturity. Among other things, the New Term Loan provides for interest on the New Term Loan at a rate per annum equal to, at the Companys option, the LIBO rate (adjusted for statutory reserves) subject to a 1.00% floor plus a margin equal to 4.00%, or an alternate base rate plus a margin equal to 3.00%.
The New Term Loan contains financial covenants with respect to debt, including, but not limited to, a maximum leverage ratio and a minimum interest coverage ratio, which covenants, pursuant to their terms, become more restrictive over time. In addition, the New Term Loan contains customary restrictive covenants, including, but not limited to, restrictions on the Companys ability to incur additional indebtedness, create liens, make investments or specified payments, give guarantees, pay dividends, make capital expenditures and merge or acquire or sell assets. Pursuant to a guarantee and collateral agreement, the Company and its domestic subsidiaries have guaranteed their respective obligations under the New Term Loan and related loan documents and have pledged substantially all of their respective assets to secure such obligations. The New Term Loan also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
In connection with the New Term Loan during the three and six month periods ended April 3, 2011, the Company recorded $8,648 of fees. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the New Term Loan. In connection with the refinancing of the Term Loan during the three and six month periods ended April 3, 2011, the Company recorded cash charges of $6,800 and accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs totaling $24,370 as an adjustment to increase interest expense. In connection with voluntary prepayments of $70,000 of term debt during the six month period ended April 3, 2011, the Company recorded accelerated amortization of portions of the unamortized discount and unamortized Debt issuance costs totaling $3,581 as an adjustment to increase interest expense.
At April 3, 2011 and September 30, 2010, the aggregate amount outstanding under the Term Loan totaled $678,300 and $750,000, respectively.
9.5% Notes
At both April 3, 2011 and September 30, 2010, the Company had outstanding principal of $750,000 under the 9.5% Notes maturing June 15, 2018.
The Company may redeem all or a part of the 9.5% Notes, upon not less than 30 or more than 60 days notice, at specified redemption prices. Further, the indenture governing the 9.5% Notes (the 2018 Indenture) requires the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.
The 2018 Indenture contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2018 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2018 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 9.5% Notes. If any other event of default under the 2018 Indenture occurs and is continuing, the trustee for the 2018 Indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 9.5% Notes may declare the acceleration of the amounts due under those notes.
The 9.5% Notes were issued at a 1.37% discount and were recorded net of the $10,245 amount incurred. The discount is reflected as an adjustment to the carrying value of principal, and is being amortized with a corresponding charge to interest expense over the remaining life of the 9.5% Notes. During Fiscal 2010, the Company recorded $20,823 of fees in connection with the issuance of the 9.5% Notes. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 9.5% Notes.
13
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
12% Notes
On August 28, 2009, in connection with emergence from the voluntary reorganization under Chapter 11 of the Bankruptcy Code and pursuant to the Debtors confirmed plan of reorganization, the Company issued $218,076 in aggregate principal amount of 12% Notes maturing August 28, 2019. Semiannually, at its option, the Company may elect to pay interest on the 12% Notes in cash or as payment in kind (PIK). PIK interest is added to principal on the relevant semi-annual interest payment date. Under the Prior Term Facility, the Company agreed to make interest payments on the 12% Notes through PIK for the first three semi-annual interest payment periods. As a result of the refinancing of the Prior Term Facility, the Company is no longer required to make interest payments as payment in kind after the semi-annual interest payment date of August 28, 2010. Effective with the semi-annual interest payment date of February 28, 2011, the Company gave notice to the trustee that the interest payment due August 28, 2011 would be made in cash.
The Company may redeem all or a part of the 12% Notes, upon not less than 30 or more than 60 days notice, beginning August 28, 2012 at specified redemption prices. Further, the indenture governing the 12% Notes (the 2019 Indenture) require the Company to make an offer, in cash, to repurchase all or a portion of the applicable outstanding notes for a specified redemption price, including a redemption premium, upon the occurrence of a change of control of the Company, as defined in such indenture.
At April 3, 2011 and September 30, 2010, the Company had outstanding principal of $245,031 under the 12% Notes, including PIK interest of $26,955 added to principal during Fiscal 2010.
The 2019 Indenture contains customary covenants that limit, among other things, the incurrence of additional indebtedness, payment of dividends on or redemption or repurchase of equity interests, the making of certain investments, expansion into unrelated businesses, creation of liens on assets, merger or consolidation with another company, transfer or sale of all or substantially all assets, and transactions with affiliates.
In addition, the 2019 Indenture provides for customary events of default, including failure to make required payments, failure to comply with certain agreements or covenants, failure to make payments on or acceleration of certain other indebtedness, and certain events of bankruptcy and insolvency. Events of default under the 2019 Indenture arising from certain events of bankruptcy or insolvency will automatically cause the acceleration of the amounts due under the 12% Notes. If any other event of default under the 2019 Indenture occurs and is continuing, the trustee for the indenture or the registered holders of at least 25% in the then aggregate outstanding principal amount of the 12% Notes may declare the acceleration of the amounts due under those notes.
The Company is subject to certain limitations as a result of the Companys Fixed Charge Coverage Ratio under the 2019 Indenture being below 2:1. Until the test is satisfied, Spectrum Brands and certain of its subsidiaries are limited in their ability to make significant acquisitions or incur significant additional senior credit facility debt beyond the Senior Credit Facilities. The Company does not expect its inability to satisfy the Fixed Charge Coverage Ratio test to impair its ability to provide adequate liquidity to meet the short-term and long-term liquidity requirements of its existing businesses, although no assurance can be given in this regard.
In connection with the Merger, the Company obtained the consent of the note holders to certain amendments to the 2019 Indenture (the Supplemental Indenture). The Supplemental Indenture became effective upon the closing of the Merger. Among other things, the Supplemental Indenture amended the definition of change in control to exclude the Harbinger Capital Partners Master Fund I, Ltd. (Harbinger Master Fund), Harbinger Capital Partners Special Situations Fund, L.P. (Harbinger Special Fund) and, together with Harbinger Master Fund, the HCP Funds), Global Opportunities Breakaway Ltd. (together with the HCP Funds, the Harbinger Parties), and their respective affiliates and increased the Companys ability to incur indebtedness up to $1,850,000.
During Fiscal 2010, the Company recorded $2,966 of fees in connection with the consent. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the 12% Notes effective with the closing of the Merger.
ABL Revolving Credit Facility
The ABL Revolving Credit Facility is governed by a credit agreement (the ABL Credit Agreement) with Bank of America as administrative agent (the Agent). The ABL Revolving Credit Facility consists of revolving loans (the Revolving Loans), with a portion available for letters of credit and a portion available as swing line loans, in each case subject to the terms and limits described therein.
The Revolving Loans may be drawn, repaid and reborrowed without premium or penalty. The proceeds of borrowings under the ABL Revolving Credit Facility are to be used for costs, expenses and fees in connection with the ABL Revolving Credit Facility, working capital requirements of the Company and its subsidiaries, restructuring costs, and for other general corporate purposes.
14
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Prior to April 21, 2011, the ABL Revolving Credit Facility carried an interest rate, at the Companys option, which was subject to change based on availability under the facility, of either: (a) the base rate plus currently 2.75% per annum or (b) the reserve-adjusted LIBO rate (the Eurodollar Rate) plus currently 3.75% per annum. No amortization was required with respect to the ABL Revolving Credit Facility. The ABL Revolving Credit Facility was scheduled to mature on June 16, 2014. As described further below, effective April 21, 2011, the Company entered into certain amendments to the ABL Credit Agreement.
The ABL Credit Agreement contains various representations and warranties and covenants, including, without limitation, enhanced collateral reporting, and a maximum fixed charge coverage ratio. The ABL Credit Agreement also provides for customary events of default, including payment defaults and cross-defaults on other material indebtedness.
During Fiscal 2010, the Company recorded $9,839 of fees in connection with the ABL Revolving Credit Facility. The fees are classified as Debt issuance costs within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) and are amortized as an adjustment to interest expense over the remaining life of the ABL Revolving Credit Facility. Pursuant to the credit and security agreement, the obligations under the ABL credit agreement are secured by certain current assets of the guarantors, including, but not limited to, deposit accounts, trade receivables and inventory.
As a result of borrowings and payments under the ABL Revolving Credit Facility at April 3, 2011, the Company had aggregate borrowing availability of approximately $81,527, net of lender reserves of $28,568.
At April 3, 2011, the Company had outstanding letters of credit of $36,121 under the ABL Revolving Credit Facility.
As a result of borrowings and payments under the ABL Revolving Credit Facility at September 30, 2010, the Company had aggregate borrowing availability of approximately $225,255, net of lender reserves of $28,972.
Effective as of September 22, 2010, March 3, 2011 and April 21, 2011, the Company entered into certain amendments to the ABL Credit Agreement, pursuant to which the Agent and the lenders under the ABL Credit Agreement consented to certain amendments, including, without limitation, the following:
| the maturity date under the ABL Credit Agreement was extended to April 21, 2016 from June 16, 2014; |
| the interest margins under the ABL Revolving Credit Facility were reduced to, depending on the average availability, either (i) base rate plus a margin equal to 1.00%, 1.25% or 1.50% per annum (previously 2.50%, 2.75% or 3.00%), as applicable, or (ii) LIBOR plus a margin equal to 2.00%, 2.25% or 2.50% per annum (previously 3.50%, 3.75% or 4.00%), as applicable; |
| the unused commitments fees payable by the Company were reduced to (i) a rate per annum equal to 0.375% (previously 0.50%) when utilization equals or exceeds 50% of the aggregate commitments under the ABL Revolving Credit Facility and (ii) a rate per annum equal to 0.50% (previously 0.75%) when utilization is less than 50% of such commitments; |
| the covenants in respect of agents inspection rights and certain restrictions on liens, debt, acquisitions, accounts receivable dispositions, restricted payments and prepayments of subordinated debt were amended to be more favorable to, and generally allow greater operational flexibility for, the Company and the other borrowers; and |
| amendments to allow for certain internal corporate restructuring transactions to be undertaken by the Company. |
8 | DERIVATIVE FINANCIAL INSTRUMENTS |
Derivative financial instruments are used by the Company principally in the management of its interest rate, foreign currency and raw material price exposures. The Company does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, the Company formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. The Company formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instruments change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.
15
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Under ASC Topic 815: Derivatives and Hedging, (ASC 815), entities are required to provide enhanced disclosures for derivative and hedging activities.
The Companys fair value of outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) were as follows:
Asset Derivatives |
April 3, 2011 |
September 30, 2010 |
||||||||||
Derivatives designated as hedging instruments under ASC 815: |
||||||||||||
Commodity contracts |
ReceivablesOther | $ | 2,567 | $ | 2,371 | |||||||
Commodity contracts |
Deferred charges and other | 1,600 | 1,543 | |||||||||
Foreign exchange contracts |
ReceivablesOther | 807 | 20 | |||||||||
Foreign exchange contracts |
Deferred charges and other | 41 | 55 | |||||||||
Total asset derivatives designated as hedging instruments under ASC 815 |
$ | 5,015 | $ | 3,989 | ||||||||
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||
Foreign exchange contracts |
ReceivablesOther | 18 | | |||||||||
Total asset derivatives |
$ | 5,033 | $ | 3,989 | ||||||||
The Companys fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited) were as follows:
Liability Derivatives |
April 3, 2011 |
September 30, 2010 |
||||||||||
Derivatives designated as hedging instruments under ASC 815: |
||||||||||||
Interest rate contracts |
Accounts payable | $ | 3,701 | $ | 3,734 | |||||||
Interest rate contracts |
Accrued interest | 862 | 861 | |||||||||
Interest rate contracts |
Other long term liabilities | | 2,032 | |||||||||
Commodity contracts |
Accounts payable | 155 | | |||||||||
Foreign exchange contracts |
Accounts payable | 12,538 | 6,544 | |||||||||
Foreign exchange contracts |
Other long term liabilities | 2,100 | 1,057 | |||||||||
Total liability derivatives designated as hedging instruments under ASC 815 |
$ | 19,356 | $ | 14,228 | ||||||||
Derivatives not designated as hedging instruments under ASC 815: |
||||||||||||
Foreign exchange contracts |
Accounts payable | 13,697 | 9,698 | |||||||||
Foreign exchange contracts |
Other long term liabilities | 21,459 | 20,887 | |||||||||
Total liability derivatives |
$ | 54,512 | $ | 44,813 | ||||||||
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
16
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three month period ended April 3, 2011:
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Location
of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||
Commodity contracts |
$ | (150 | ) | |
Cost of goods sold |
|
$ | 784 | |
Cost of goods sold |
|
$ | (6 | ) | ||||||
Interest rate contracts |
(67 | ) | |
Interest expense |
|
(839 | ) | |
Interest expense |
|
(148 | ) | ||||||||
Foreign exchange contracts |
616 | Net sales | (88 | ) | Net sales | | ||||||||||||||
Foreign exchange contracts |
(12,732 | ) | |
Cost of goods sold |
|
(1,967 | ) | |
Cost of goods sold |
|
| |||||||||
Total |
$ | (12,333 | ) | $ | (2,110 | ) | $ | (154 | ) | |||||||||||
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the six month period ended April 3, 2011:
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount
of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Location
of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||
Commodity contracts |
$ | 1,873 | |
Cost of goods sold |
|
$ | 1,334 | |
Cost of goods sold |
|
$ | (5 | ) | |||||||
Interest rate contracts |
(60 | ) | |
Interest expense |
|
(1,688 | ) | |
Interest expense |
|
(250 | ) | ||||||||
Foreign exchange contracts |
227 | Net sales | (207 | ) | Net sales | | ||||||||||||||
Foreign exchange contracts |
(10,790 | ) | |
Cost of goods sold |
|
(4,092 | ) | |
Cost of goods sold |
|
| |||||||||
Total |
$ | (8,750 | ) | $ | (4,653 | ) | $ | (255 | ) | |||||||||||
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the three month period ended April 4, 2010:
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Location
of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||||
Commodity contracts |
$ | (1,210 | ) | |
Cost of goods sold |
|
$ | 620 | |
Cost of goods sold |
|
$ | 70 | |||||||
Interest rate contracts |
(5,893 | ) | |
Interest expense |
|
(1,740 | ) | |
Interest expense |
|
| |||||||||
Foreign exchange contracts |
(231 | ) | Net sales | (92 | ) | Net sales | | |||||||||||||
Foreign exchange contracts |
2,466 | |
Cost of goods sold |
|
509 | |
Cost of goods sold |
|
| |||||||||||
Total |
$ | (4,868 | ) | $ | (703 | ) | $ | 70 | ||||||||||||
17
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations (Unaudited) for the six month period ended April 4, 2010:
Derivatives in ASC 815 Cash Flow Hedging Relationships |
Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) |
Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Amount
of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) |
Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount
of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||||
Commodity contracts |
$ | 2,446 | |
Cost of goods sold |
|
$ | 951 | Cost of goods sold |
$ | 141 | ||||||||
Interest rate contracts |
(11,646 | ) | |
Interest expense |
|
(2,978 | ) | Interest expense |
| |||||||||
Foreign exchange contracts |
(350 | ) | Net sales | (186 | ) | Net sales | | |||||||||||
Foreign exchange contracts |
2,045 | |
Cost of goods sold |
|
(219 | ) | Cost of goods sold |
| ||||||||||
Total |
$ | (7,505 | ) | $ | (2,432 | ) | $ | 141 | ||||||||||
Derivative Contracts
For derivative instruments that are used to economically hedge the fair value of the Companys third party and intercompany foreign exchange payments, commodity purchases and interest rate payments, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three month period ended April 3, 2011 and the three month period ended April 4, 2010, the Company recognized the following respective gains (losses) on derivative contracts:
Derivatives Not Designated as Hedging Instruments Under ASC 815 |
Amount of Gain (Loss) Recognized in Income on Derivatives |
Location of Gain or (Loss) Recognized in Income on Derivatives |
||||||||||
2011 | 2010 | |||||||||||
Commodity contracts |
$ | | $ | 149 | Cost of goods sold | |||||||
Foreign exchange contracts |
(18,948 | ) | (459 | ) | Other expense, net | |||||||
Total |
$ | (18,948 | ) | $ | (310 | ) | ||||||
During the six month period ended April 3, 2011 and the six month period ended April 4, 2010, the Company recognized the following respective gains (losses) on derivative contracts:
Derivatives Not Designated as Hedging Instruments Under ASC 815 |
Amount of Gain (Loss) Recognized in Income on Derivatives |
Location of Gain or (Loss) Recognized in Income on Derivatives |
||||||||||
2011 | 2010 | |||||||||||
Commodity contracts |
$ | | $ | 191 | Cost of goods sold | |||||||
Foreign exchange contracts |
(9,890 | ) | (2,289 | ) | Other expense, net | |||||||
Total |
$ | (9,890 | ) | $ | (2,098 | ) |
18
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Credit Risk
The Company is exposed to the default risk of the counterparties with which the Company transacts. The Company monitors counterparty credit risk on an individual basis by periodically assessing each such counterpartys credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are primarily concentrated with a foreign financial institution counterparty. The Company considers these exposures when measuring its credit reserve on its derivative assets, which were $71 and $75 at April 3, 2011 and September 30, 2010, respectively. Additionally, the Company does not require collateral or other security to support financial instruments subject to credit risk.
The Companys standard contracts do not contain credit risk related contingent features whereby the Company would be required to post additional cash collateral as a result of a credit event. However, the Company is typically required to post collateral in the normal course of business to offset its liability positions. At both April 3, 2011 and September 30, 2010, the Company had posted cash collateral of $2,363 related to such liability positions. In addition, at both April 3, 2011 and September 30, 2010, the Company had posted standby letters of credit of $4,000 related to such liability positions. The cash collateral is included in Current AssetsReceivables-Other within the accompanying Condensed Consolidated Statements of Financial Position (Unaudited).
Derivative Financial Instruments
Cash Flow Hedges
The Company uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At April 3, 2011, the Company had a portfolio of U.S. dollar-denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012. At September 30, 2010, the Company had a portfolio of U.S. dollar-denominated interest rate swaps outstanding which effectively fixed the interest on floating rate debt, exclusive of lender spreads as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the U.S. dollar swaps). The derivative net loss on these contracts recorded in AOCI by the Company at April 3, 2011 was $(1,666), net of tax benefit of $1,021. The derivative net (loss) on the U.S. dollar swaps contracts recorded in AOCI by the Company at September 30, 2010 was $(2,675), net of tax benefit of $1,640. At April 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $(1,666), net of tax.
The Company periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign denominated third party and intercompany sales or payments. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to Net sales or purchase price variance in Cost of goods sold. At April 3, 2011 the Company had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $314,521. At September 30, 2010, the Company had a series of foreign exchange derivative contracts outstanding through June 2012 with a contract value of $299,993. The derivative net loss on these contracts recorded in AOCI by the Company at April 3, 2011 was $(9,770), net of tax benefit of $4,021. The derivative net (loss) on these contracts recorded in AOCI by the Company at September 30, 2010 was $(5,322), net of tax benefit of $2,204. At April 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $(8,336), net of tax.
The Company is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. The Company hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At April 3, 2011 the Company had a series of such swap contracts outstanding through September 2012 for 11 tons with a contract value of $23,141. At September 30, 2010, the Company had a series of such swap contracts outstanding through September 2012 for 15 tons with a contract value of $28,897. The derivative net gain on these contracts recorded in AOCI by the Company at April 3, 2011 was $2,606, net of tax expense of $1,390. The derivative net gain on these contracts recorded in AOCI by the Company at September 30, 2010 was $2,256, net of tax expense of $1,201. At April 3, 2011, the portion of derivative net gains estimated to be reclassified from AOCI into earnings by the Company over the next 12 months is $1,571, net of tax.
19
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Derivative Contracts
The Company periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require the Company to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Statements of Financial Position (Unaudited). The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At April 3, 2011 and September 30, 2010, the Company had $318,520 and $333,562, respectively, of such foreign exchange derivative notional value contracts outstanding.
9 | FAIR VALUE OF FINANCIAL INSTRUMENTS |
ASC Topic 820: Fair Value Measurements and Disclosures, (ASC 820), establishes a framework for measuring fair value and expands related disclosures. Broadly, the ASC 820 framework requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. ASC 820 establishes market or observable inputs as the preferred source of values, followed by assumptions based on hypothetical transactions in the absence of market inputs. The Company utilizes valuation techniques that attempt to maximize the use of observable inputs and minimize the use of unobservable inputs. The determination of the fair values considers various factors, including closing exchange or over-the-counter market pricing quotations, time value and credit quality factors underlying options and contracts. The fair value of certain derivative financial instruments is estimated using pricing models based on contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as using prices of one delivery point to calculate the price of the contracts different delivery point. The nominal value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by applying a credit reserve which is calculated based on credit default swaps or published default probabilities for the actual and potential asset value, the fair value of the Companys derivative financial instruments assets reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the requirements of a reserve for non-performance, which is calculated based on the probability of default by the Company, the Company adjusts its derivative contract liabilities to reflect the price at which a potential market participant would be willing to assume the Companys liabilities. The Company has not changed its valuation techniques in measuring the fair value of any financial assets and liabilities during the periods presented.
The valuation techniques required by ASC 820 are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the Company. These two types of inputs create the following fair value hierarchy:
Level 1 | Unadjusted quoted prices for identical instruments in active markets. | |
Level 2 | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. | |
Level 3 | Significant inputs to the valuation model are unobservable. |
The Company maintains policies and procedures to value instruments using the best and most relevant data available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls must be determined based on the lowest level input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. In addition, the Company has risk management teams that review valuation, including independent price validation for certain instruments. Further, in other instances, the Company retains independent pricing vendors to assist in valuing certain instruments.
The Companys derivatives are valued using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities.
The Companys net derivative portfolio as of April 3, 2011, contains Level 2 instruments and represents commodity, interest rate and foreign exchange contracts.
20
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Commodity contracts, net |
$ | | $ | 4,012 | $ | | $ | 4,012 | ||||||||
Total Assets |
$ | | $ | 4,012 | $ | | $ | 4,012 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate contracts |
$ | | $ | (4,563 | ) | $ | | $ | (4,563 | ) | ||||||
Foreign exchange contracts, net |
| (48,928 | ) | | (48,928 | ) | ||||||||||
Total Liabilities |
$ | | $ | (53,491 | ) | $ | | $ | (53,491 | ) | ||||||
The Companys net derivative portfolio as of September 30, 2010, contains Level 2 instruments and represents commodity, interest rate and foreign exchange contracts.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Commodity contracts, net |
$ | | $ | 3,914 | $ | | $ | 3,914 | ||||||||
Total Assets |
$ | | $ | 3,914 | $ | | $ | 3,914 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate contracts |
$ | | $ | (6,627 | ) | $ | | $ | (6,627 | ) | ||||||
Foreign exchange contracts, net |
| (38,111 | ) | $ | | (38,111 | ) | |||||||||
Total Liabilities |
$ | | $ | (44,738 | ) | $ | | $ | (44,738 | ) | ||||||
The carrying values of cash and cash equivalents, accounts and other receivables, accounts payable and short-term debt approximate fair value. The fair values of long-term debt and derivative financial instruments are generally based on quoted or observed market prices.
Goodwill, intangible assets and other long-lived assets are also tested annually, or more frequently if a triggering event occurs that indicates an impairment loss may have been incurred, using fair value measurements with unobservable inputs (Level 3). (See also Note 2, Significant Accounting PoliciesIntangible Assets, for further details on impairment testing.)
The carrying amounts and fair values of the Companys financial instruments are summarized as follows ((liability)/asset):
April 3, 2011 | September 30, 2010 | |||||||||||||||
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||||||
Total debt |
$ | (1,825,100 | ) | $ | (1,944,755 | ) | $ | (1,743,767 | ) | $ | (1,868,754 | ) | ||||
Interest rate swap agreements |
(4,563 | ) | (4,563 | ) | (6,627 | ) | (6,627 | ) | ||||||||
Commodity swap and option agreements |
4,012 | 4,012 | 3,914 | 3,914 | ||||||||||||
Foreign exchange forward agreements |
(48,928 | ) | (48,928 | ) | (38,111 | ) | (38,111 | ) |
10 | EMPLOYEE BENEFIT PLANS |
Pension Benefits
The Company has various defined benefit pension plans covering some of its employees in the U.S. and certain employees in other countries, primarily the United Kingdom and Germany. These pension plans generally provide benefits of stated amounts for each year of service. The Company funds its U.S. pension plans in accordance with the Internal Revenue Service (IRS) defined guidelines and, where applicable, in amounts sufficient to satisfy the minimum funding requirements of applicable laws. Additionally, in compliance with the Companys funding policy, annual contributions to non-U.S. defined benefit plans are equal to the actuarial recommendations or statutory requirements in the respective countries. The Company also sponsors or participates in a number of other non-U.S. pension arrangements, including various retirement and termination benefit plans, some of which are covered by local law or coordinated with government-sponsored plans, which are not significant in the aggregate and therefore are not included in the information presented below. The Company also has various nonqualified deferred compensation agreements with certain of its employees. Under certain of these agreements, the Company has agreed to pay certain amounts annually for the first 15 years
21
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
subsequent to retirement or to a designated beneficiary upon death. It is managements intent that life insurance contracts owned by the Company will fund these agreements. Under the remaining agreements, the Company has agreed to pay such deferred amounts in up to 15 annual installments beginning on a date specified by the employee, subsequent to retirement or disability, or to a designated beneficiary upon death.
Other Benefits
Under the Rayovac postretirement plan, the Company provides certain health care and life insurance benefits to eligible retired employees. Participants earn retiree health care benefits after reaching age 45 over the next 10 succeeding years of service and remain eligible until reaching age 65. The plan is contributory and, accordingly, retiree contributions have been established as a flat dollar amount with contribution rates expected to increase at the active medical trend rate. This plan is unfunded. The Company is amortizing the transition obligation over a 20-year period.
Under the Tetra U.S. postretirement plan, the Company provides postretirement medical benefits to full-time employees who meet minimum age and service requirements. The plan is contributory with retiree contributions adjusted annually and contains other cost-sharing features such as deductibles, coinsurance and copayments.
The Companys results of operations for the three and six month periods ended April 3, 2011 and April 4, 2010 reflect the following pension and deferred compensation benefit costs:
Three Months | Six Months | |||||||||||||||
Components of net periodic pension benefit and deferred compensation benefit cost |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost |
$ | 781 | $ | 725 | $ | 1,563 | $ | 1,450 | ||||||||
Interest cost |
2,557 | 1,813 | 5,113 | 3,626 | ||||||||||||
Expected return on assets |
(1,965 | ) | (1,272 | ) | (3,931 | ) | (2,544 | ) | ||||||||
Amortization of prior service cost |
| 1 | | 3 | ||||||||||||
Recognized net actuarial loss |
97 | 1 | 194 | 3 | ||||||||||||
Employee contributions |
(129 | ) | (88 | ) | (257 | ) | (177 | ) | ||||||||
Net periodic benefit cost |
$ | 1,341 | $ | 1,180 | $ | 2,682 | $ | 2,361 | ||||||||
Three Months | Six Months | |||||||||||||||
Pension and deferred compensation contributions |
2011 | 2010 | 2011 | 2010 | ||||||||||||
Contributions made during period |
$ | 1,925 | $ | 1,635 | $ | 2,956 | $ | 2,003 |
The following table sets forth the fair value of the Companys pension plan assets as of April 3, 2011 segregated by level within the fair value hierarchy (See Note 9Fair Value of Financial Instruments, for discussion of the fair value hierarchy and fair value principles):
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
U.S. Defined Benefit Plan Assets: |
||||||||||||||||
Common collective trustequity |
$ | | $ | 35,253 | $ | | $ | 35,253 | ||||||||
Common collective trustfixed income |
| 12,711 | | 12,711 | ||||||||||||
Total U.S. Defined Benefit Plan Assets |
$ | | $ | 47,964 | $ | | $ | 47,964 | ||||||||
International Defined Benefit Plan Assets: |
||||||||||||||||
Common collective trustequity |
$ | | $ | 32,408 | $ | | $ | 32,408 | ||||||||
Common collective trustfixed income |
| 10,621 | | 10,621 | ||||||||||||
Insurance contractsgeneral fund |
| 42,041 | | 42,041 | ||||||||||||
Other |
| 5,101 | | 5,101 | ||||||||||||
Total International Defined Benefit Plan Assets |
$ | | $ | 90,171 | $ | | $ | 90,171 | ||||||||
22
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
The following table sets forth the fair value of the Companys pension plan assets as of September 30, 2010 segregated by level within the fair value hierarchy:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
U.S. Defined Benefit Plan Assets: |
||||||||||||||||
Common collective trustequity |
$ | | $ | 28,168 | $ | | $ | 28,168 | ||||||||
Common collective trustfixed income |
| 16,116 | | 16,116 | ||||||||||||
Total U.S. Defined Benefit Plan Assets |
$ | | $ | 44,284 | $ | | $ | 44,284 | ||||||||
International Defined Benefit Plan Assets: |
||||||||||||||||
Common collective trustequity |
$ | | $ | 28,090 | $ | | $ | 28,090 | ||||||||
Common collective trustfixed income |
| 9,725 | | 9,725 | ||||||||||||
Insurance contractsgeneral fund |
| 40,347 | | 40,347 | ||||||||||||
Other |
| 3,120 | | 3,120 | ||||||||||||
Total International Defined Benefit Plan Assets |
$ | | $ | 81,282 | $ | | $ | 81,282 | ||||||||
The Company sponsors a defined contribution pension plan for its domestic salaried employees, which allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. Prior to April 1, 2009 the Company contributed annually from 3% to 6% of participants compensation based on age or service, and had the ability to make additional discretionary contributions. The Company suspended all contributions to its U.S. subsidiaries defined contribution pension plans effective April 1, 2009 through December 31, 2009. Effective January 1, 2010 the Company reinstated its annual contribution as described above. The Company also sponsors defined contribution pension plans for employees of certain foreign subsidiaries. Company contributions charged to operations, including discretionary amounts, for the three and six month periods ended April 3, 2011 were $1,342 and $2,753, respectively. Company contributions charged to operations, including discretionary amounts, for the three and six month periods ended April 4, 2010 were $1,377 and $1,476, respectively.
11 | INCOME TAXES |
The Company files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions and is subject to ongoing examination by the various taxing authorities. The Companys major taxing jurisdictions are the U.S., United Kingdom and Germany. In the U.S., federal tax filings for years prior to and including the Companys fiscal year ended September 30, 2006 are closed. However, the federal net operating loss carryforward from the Companys fiscal year ended September 30, 2006 is subject to IRS examination until the year that such net operating loss carryforward is utilized and that year is closed for audit. The Companys fiscal years ended September 30, 2007, 2008, 2009, and 2010 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.
In the U.S., federal tax filings for years prior to and including Russell Hobbs fiscal year ended June 30, 2008 are closed. However, the federal net operating loss carryforward from Russell Hobbs fiscal year ended June 30, 2008 is subject to IRS examination until the year that such net operating loss carryforward is utilized and that year is closed for audit. Russell Hobbs fiscal years ended June 30, 2009 and June 16, 2010 remain open to examination by the IRS. Filings in various U.S. state and local jurisdictions are also subject to audit and to date no significant audit matters have arisen.
12 | SEGMENT RESULTS |
Effective October 1, 2010 the Company began managing its business in three vertically integrated, product-focused reporting segments; (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and (iii) the Home and Garden Business (See Note 1, Description of Business, for additional information regarding the Companys realignment of its reporting segments).
Global strategic initiatives and financial objectives for each reportable segment are determined at the corporate level. Each reportable segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within that segment.
Net sales and Cost of goods sold to other business segments have been eliminated. The gross contribution of intersegment sales is included in the segment selling the product to the external customer. Segment net sales are based upon the segment from which the product is shipped.
The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, reorganization items expense, interest expense, interest income and income tax expense. In connection with the realignment of reportable segments discussed above, as of October 1, 2010, certain general and administrative expenses necessary to reflect the
23
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
operating segments on a standalone basis and which were previously reflected in operating segment profits, have been excluded in the determination of reportable segment profits. Accordingly, corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plans costs which are evaluated on a consolidated basis and not allocated to the Companys operating segments. All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are identified to operating segments or corporate expense according to the function of each cost center.
All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
The financial information presented herein reflects the impact of all of the segment structure changes discussed above for all periods presented.
Segment information for the three and six month periods ended April 3, 2011 and April 4, 2010 is as follows:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales from external customers |
||||||||||||||||
Global Batteries & Appliances |
$ | 459,392 | $ | 308,264 | $ | 1,155,964 | $ | 736,936 | ||||||||
Global Pet Supplies |
144,222 | 148,177 | 281,267 | 285,172 | ||||||||||||
Home and Garden Business |
90,271 | 76,145 | 117,721 | 102,418 | ||||||||||||
Total segments |
$ | 693,885 | $ | 532,586 | $ | 1,554,952 | $ | 1,124,526 | ||||||||
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Segment profit (loss) |
||||||||||||||||
Global Batteries & Appliances |
$ | 41,682 | $ | 35,392 | $ | 134,982 | $ | 83,096 | ||||||||
Global Pet Supplies |
18,472 | 19,211 | 34,711 | 20,597 | ||||||||||||
Home and Garden Business |
14,917 | 10,967 | 8,087 | 1,387 | ||||||||||||
Total segments |
75,071 | 65,570 | 177,780 | 105,080 | ||||||||||||
Corporate expense |
15,247 | 11,369 | 26,667 | 23,262 | ||||||||||||
Acquisition and integration related charges |
7,588 | 3,039 | 24,043 | 5,470 | ||||||||||||
Restructuring and related charges |
5,147 | 5,391 | 10,712 | 11,818 | ||||||||||||
Interest expense |
72,431 | 48,410 | 125,525 | 97,892 | ||||||||||||
Other expense, net |
(287 | ) | 6,338 | 602 | 6,984 | |||||||||||
Loss from continuing operations before reorganization items and income taxes |
$ | (25,055 | ) | $ | (8,977 | ) | $ | (9,769 | ) | $ | (40,346 | ) | ||||
April 3, 2011 |
September 30, 2010 |
|||||||
Segment total assets |
||||||||
Global Batteries & Appliances |
$ | 2,328,274 | $ | 2,477,091 | ||||
Global Pet Supplies |
869,259 | 839,191 | ||||||
Home and Garden Business |
552,513 | 496,143 | ||||||
Total segments |
3,750,046 | 3,812,425 | ||||||
Corporate |
51,254 | 61,179 | ||||||
Total assets at period end |
$ | 3,801,300 | $ | 3,873,604 | ||||
The Global Batteries & Appliances segment does business in Venezuela through a Venezuelan subsidiary. At January 4, 2010, the beginning of the Companys second quarter of Fiscal 2010, the Company determined that Venezuela meets the definition of a highly inflationary economy under GAAP. As a result, beginning January 4, 2010, the U.S. dollar is the functional currency for the Companys Venezuelan subsidiary. Accordingly, going forward, currency remeasurement adjustments for this subsidiarys financial statements and other transactional foreign exchange gains and losses are reflected in earnings. Through January 3, 2010, prior to being designated as highly inflationary, translation adjustments related to our Venezuelan subsidiary were reflected in Shareholders equity as a component of other comprehensive income.
24
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
In addition, on January 8, 2010, the Venezuelan government announced its intention to devalue its currency, the Bolivar fuerte, relative to the U.S. dollar. The official exchange rate for imported goods classified as essential, such as food and medicine, changed from 2.15 to 2.6 to the U.S. dollar, while payments for other non-essential goods moved to an exchange rate of 4.3 to the U.S. dollar. Some of the Companys imported products are expected to fall into the essential classification and qualify for the 2.6 rate; however, the Companys overall results in Venezuela will be reflected at the 4.3 rate expected to be applicable to dividend repatriations. As a result, the Company remeasured the local statement of financial position of its Venezuela entity during the second quarter of Fiscal 2010 to reflect the impact of the devaluation. There is also an ongoing impact related to measuring the Companys Venezuelan statement of operations at the new exchange rate of 4.3 to the U.S. dollar.
The designation of the Companys Venezuela entity as a highly inflationary economy and the devaluation of the Bolivar fuerte resulted in a $1,156 reduction to the Companys operating income and a foreign exchange loss, reported in Other expense, net, of $5,823 for both the three and six month periods ended April 4, 2010.
13 | RESTRUCTURING AND RELATED CHARGES |
The Company reports restructuring and related charges associated with manufacturing and related initiatives in Cost of goods sold. Restructuring and related charges reflected in Cost of goods sold include, but are not limited to, termination, compensation and related costs associated with manufacturing employees, asset impairments relating to manufacturing initiatives, and other costs directly related to the restructuring or integration initiatives implemented.
The Company reports restructuring and related charges relating to administrative functions in Operating expenses, such as initiatives impacting sales, marketing, distribution, or other non-manufacturing related functions. Restructuring and related charges reflected in Operating expenses include, but are not limited to, termination and related costs, any asset impairments relating to the functional areas described above, and other costs directly related to the initiatives implemented as well as consultation, legal and accounting fees related to the evaluation of the Predecessor Companys capital structure incurred prior to the Bankruptcy filing.
The following table summarizes restructuring and related charges incurred by segment for the three and six month periods ended April 3, 2011 and April 4, 2010:
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of goods sold: |
||||||||||||||||
Global Batteries & Appliances |
$ | 250 | $ | 606 | $ | 100 | $ | 1,453 | ||||||||
Global Pet Supplies |
1,803 | 1,383 | 2,547 | 2,149 | ||||||||||||
Home and Garden Business |
| | | 38 | ||||||||||||
Total restructuring and related charges in cost of goods sold |
2,053 | 1,989 | 2,647 | 3,640 | ||||||||||||
Operating expenses: |
||||||||||||||||
Global Batteries & Appliances |
592 | 733 | 617 | (206 | ) | |||||||||||
Global Pet Supplies |
1,278 | (26 | ) | 3,580 | 502 | |||||||||||
Home and Garden Business |
686 | 1,494 | 1,336 | 7,838 | ||||||||||||
Corporate |
538 | 1,201 | 2,532 | 44 | ||||||||||||
Total restructuring and related charges in operating expenses |
3,094 | 3,402 | 8,065 | 8,178 | ||||||||||||
Total restructuring and related charges |
$ | 5,147 | $ | 5,391 | $ | 10,712 | $ | 11,818 | ||||||||
2009 Restructuring Initiatives
The Company implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment and the Home and Garden Business segment to reduce operating costs as well as evaluate the Companys opportunities to improve its capital structure (the Global Cost Reduction Initiatives). These initiatives include headcount reductions within each of the Companys segments and the exit of certain facilities in the U.S. related to the Global Pet Supplies and Home and Garden Business segments. These initiatives also included consultation, legal and accounting fees related to the evaluation of the Companys capital structure. The Company recorded $4,378 and $8,107 of pretax restructuring and related charges during the three and six month periods
25
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
ended April 3, 2011, respectively, and the Company recorded $3,668 and $11,389 of pretax restructuring and related charges during the three and six month periods ended April 4, 2010, respectively, related to the Global Cost Reduction Initiatives. Costs associated with these initiatives, which are expected to be incurred through January 31, 2015, are projected to total approximately $60,700.
Global Cost Reduction Initiatives Summary
The following table summarizes the remaining accrual balance associated with the 2009 initiatives and the activity during the six month period ended April 3, 2011:
Termination Benefits |
Other Costs |
Total | ||||||||||
Accrual balance at September 30, 2010 |
$ | 6,447 | $ | 4,005 | $ | 10,452 | ||||||
Provisions |
3,867 | 501 | 4,368 | |||||||||
Cash expenditures |
(3,120 | ) | (1,968 | ) | (5,088 | ) | ||||||
Non-cash items |
250 | 515 | 765 | |||||||||
Accrual balance at April 3, 2011 |
$ | 7,444 | $ | 3,053 | $ | 10,497 | ||||||
Expensed as incurred(A) |
$ | 134 | $ | 3,605 | $ | 3,739 |
(A) | Consists of amounts not impacting the accrual for restructuring and related charges. |
The following table summarizes the expenses incurred during the six month period ended April 3, 2011, the cumulative amount incurred to date and the total future expected costs to be incurred associated with the Global Cost Reduction Initiatives by operating segment:
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Corporate | Total | ||||||||||||||||
Restructuring and related charges during the six month period ended April 3, 2011 |
$ | 644 | $ | 6,127 | $ | 1,336 | $ | | $ | 8,107 | ||||||||||
Restructuring and related charges since initiative inception |
$ | 7,683 | $ | 16,337 | $ | 15,340 | $ | 7,591 | $ | 46,951 | ||||||||||
Total future restructuring and related charges expected |
$ | | $ | 10,600 | $ | 3,109 | $ | | $ | 13,709 |
2008 Restructuring Initiatives
The Company implemented an initiative within the Global Batteries & Appliances segment in China to reduce operating costs and rationalize the Companys manufacturing structure. These initiatives include the plan to exit the Companys Ningbo, China battery manufacturing facility (the Ningbo Exit Plan). The Company recorded $250 and $100 of pretax restructuring and related charges during the three and six month period ended April 3, 2011, respectively, and $637 and $1,333 of pretax restructuring and related charges during the three and six month periods ended April 4, 2010, respectively, in connection with the Ningbo Exit Plan. The Company has recorded pretax restructuring and related charges of $29,628 since the inception of the Ningbo Exit Plan, which is now substantially complete.
Ningbo Exit Plan Summary
The following table summarizes the remaining accrual balance associated with the 2008 initiatives and the activity during the six month period ended April 3, 2011:
Other Costs |
||||
Accrual balance at September 30, 2010 |
$ | 491 | ||
Provisions |
24 | |||
Cash expenditures |
(143 | ) | ||
Non-cash items |
(372 | ) | ||
Accrual balance at April 3, 2011 |
$ | | ||
Expensed as incurred(A) |
$ | 76 |
(A) | Consists of amounts not impacting the accrual for restructuring and related charges. |
26
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
2007 Restructuring Initiatives
In Fiscal 2007, the Company began managing its business in three vertically integrated, product-focused reporting segments; Global Batteries & Personal Care (which, effective October 1, 2010, includes the appliance portion of Russell Hobbs, collectively, Global Batteries & Appliances), Global Pet Supplies and the Home and Garden Business. As part of this realignment, the Companys Global Operations organization, previously included in corporate expense, consisting of research and development, manufacturing management, global purchasing, quality operations and inbound supply chain, is now included in each of the operating segments. In connection with these changes, the Company undertook a number of cost reduction initiatives, primarily headcount reductions, at the corporate and operating segment levels (the Global Realignment Initiatives). In connection with the Global Realignment Initiatives, the Company recorded $519 and $2,505 of pretax restructuring and related charges during the three and six month periods ended April 3, 2011, respectively, and $1,194 and $(983) of pretax restructuring and related charges (credits) during the three and six month periods ended April 4, 2010, respectively. Costs associated with these initiatives, which are expected to be incurred through June 30, 2013, relate primarily to severance and are projected at approximately $92,100, the majority of which are cash costs.
Global Realignment Initiatives Summary
The following table summarizes the remaining accrual balance associated with the Global Realignment Initiatives and the activity during the six month period ended April 3, 2011:
Termination Benefits |
Other Costs |
Total | ||||||||||
Accrual balance at September 30, 2010 |
$ | 8,721 | $ | 2,281 | $ | 11,002 | ||||||
Provisions |
1,207 | 133 | 1,340 | |||||||||
Cash expenditures |
(5,473 | ) | (400 | ) | (5,873 | ) | ||||||
Non-cash items |
(681 | ) | 474 | (207 | ) | |||||||
Accrual balance at April 3, 2011 |
$ | 3,774 | $ | 2,488 | $ | 6,262 | ||||||
Expensed as incurred(A) |
$ | | $ | 1,165 | $ | 1,165 |
(A) | Consists of amounts not impacting the accrual for restructuring and related charges. |
The following table summarizes the expenses incurred during the six month period ended April 3, 2011, the cumulative amount incurred to date and the total future expected costs to be incurred associated with the Global Realignment Initiatives by operating segment:
Global Batteries & Appliances |
Home and Garden Business |
Corporate | Total | |||||||||||||
Restructuring and related charges during the six month period ended April 3, 2011 |
$ | (27 | ) | $ | | $ | 2,532 | $ | 2,505 | |||||||
Restructuring and related charges since initiative inception |
$ | 46,642 | $ | 6,762 | $ | 37,688 | $ | 91,092 | ||||||||
Total future restructuring and related charges expected |
$ | | $ | | $ | 973 | $ | 973 |
27
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
2006 Restructuring Initiatives
The Company implemented a series of initiatives within the Global Batteries & Appliances segment in Europe to reduce operating costs and rationalize the Companys manufacturing structure (the European Initiatives). These initiatives, which are substantially complete, include the relocation of certain operations at the Ellwangen, Germany packaging center to the Dischingen, Germany battery plant and restructuring its sales, marketing and support functions. The Company recorded no pretax restructuring and related charges during the three and six month periods ended April 3, 2011 or during the three and six month periods ended April 4, 2010 in connection with the European Initiatives. The Company has recorded pretax restructuring and related charges of $26,965 since the inception of the European Initiatives.
European Initiatives Summary
The following table summarizes the remaining accrual balance associated with the 2006 initiatives and the activity during the six month period ended April 3, 2011:
Termination Benefits |
Other Costs |
Total | ||||||||||
Accrual balance at September 30, 2010 |
$ | 1,801 | $ | 47 | $ | 1,848 | ||||||
Cash expenditures |
(290 | ) | (37 | ) | (327 | ) | ||||||
Non-cash items |
70 | (10 | ) | 60 | ||||||||
Accrual balance at April 3, 2011 |
$ | 1,581 | $ | | $ | 1,581 |
14 | COMMITMENTS AND CONTINGENCIES |
The Company has provided for the estimated costs associated with environmental remediation activities at some of its current and former manufacturing sites. The Company believes that any additional liability in excess of the amounts provided of approximately $8,560, which may result from resolution of these matters, will not have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
In December 2009, San Francisco Technology, Inc. filed an action in the Federal District Court for the Northern District of California against the Company, as well as a number of unaffiliated defendants, claiming that each of the defendants had falsely marked patents on certain of its products in violation of Article 35, Section 292 of the U.S. Code and seeking to have civil fines imposed on each of the defendants for such claimed violations. The Company is reviewing the claims but is unable to estimate any possible loss at this time.
Applica Consumer Products, Inc. (Applica), a wholly-owned subsidiary of the Company, was a defendant in NACCO Industries, Inc. et al. v. Applica Incorporated et al., Case No. C.A. 2541-VCL, which was filed in the Court of Chancery of the State of Delaware in November 2006. The complaints in this action alleged a claim for, among other things, breach of contract and breach of implied covenant of good faith against Applica and a number of tort claims against certain entities affiliated with the HCP Funds. The claims against Applica related to the alleged breach of the merger agreement between Applica and NACCO Industries, Inc. (NACCO) and one of its affiliates, which agreement was terminated following Applicas receipt of a superior merger offer from the HCP Funds. In February 2011, the parties to the litigation reached a full and final settlement of their disputes. Neither the Company, Applica or any other subsidiary of the Company was required to make any payments in connection with the settlement. In addition, pursuant to an indemnification agreement, dated as of February 9, 2010, between Russell Hobbs, a wholly-owned subsidiary of the Company and the parent company of Applica, and Harbinger Master Fund, the Company is indemnified against any out-of-pocket losses, costs, expenses, judgments, penalties, fines and other damages in excess of $3,000 incurred with respect to this litigation and any future litigation or legal action against the indemnified parties arising out of or relating to the matters which formed the basis of this litigation.
Applica is a defendant in three asbestos lawsuits in which the plaintiffs have alleged injury as the result of exposure to asbestos in hair dryers distributed by that subsidiary over 20 years ago. Although Applica never manufactured such products, asbestos was used in certain hair dryers distributed by it prior to 1979. The Company believes that these actions are without merit, but may be unable to resolve the disputes successfully without incurring significant expenses which the Company is unable to estimate at this time. At this time, the Company does not believe it has coverage under its insurance policies for the asbestos lawsuits.
The Company is a defendant in various other matters of litigation generally arising out of the ordinary course of business.
The Company does not believe that any other matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows.
28
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
15 | ACQUISITIONS |
Russell Hobbs
On June 16, 2010, the Company consummated the Merger, pursuant to which Spectrum Brands became a wholly-owned subsidiary of the Company and Russell Hobbs became a wholly owned subsidiary of Spectrum Brands. Headquartered in Miramar, Florida, Russell Hobbs is a designer, marketer and distributor of a broad range of branded small household appliances. Russell Hobbs markets and distributes small kitchen and home appliances, pet and pest products and personal care products. Russell Hobbs has a broad portfolio of recognized brand names, including Black & Decker, George Foreman, Russell Hobbs, Toastmaster, LitterMaid, Farberware, Breadman and Juiceman. Russell Hobbs customers include mass merchandisers, specialty retailers and appliance distributors primarily in North America, South America, Europe and Australia.
The results of Russell Hobbs operations since June 16, 2010 are included in the Companys Condensed Consolidated Statements of Operations (Unaudited). Effective October 1, 2010, substantially all of the financial results of Russell Hobbs are reported within the Global Batteries & Appliances segment. In addition, certain pest control and pet products included in the former Small Appliances segment have been reclassified into the Home and Garden Business and Global Pet Supplies segments, respectively.
In accordance with ASC Topic 805, Business Combinations (ASC 805), the Company accounted for the Merger by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition. After consummation of the Merger, the stockholders of Spectrum Brands, inclusive of the Harbinger Parties, owned approximately 60% of SB Holdings and the stockholders of Russell Hobbs owned approximately 40% of SB Holdings. Inasmuch as Russell Hobbs was a private company and its common stock was not publicly traded, the closing market price of the Spectrum Brands common stock at June 15, 2010 was used to calculate the purchase price. The total purchase price of Russell Hobbs was approximately $597,579 determined as follows:
Spectrum Brands closing price per share on June 15, 2010 |
$ | 28.15 | ||
Purchase priceRussell Hobbs allocation20,704 shares(1)(2) |
$ | 575,203 | ||
Cash payment to pay off Russell Hobbs North American credit facility |
22,376 | |||
Total purchase price of Russell Hobbs |
$ | 597,579 | ||
(1) | Number of shares calculated based upon conversion formula, as defined in the Merger Agreement, using balances as of June 16, 2010. |
(2) | The fair value of 271 shares of unvested restricted stock units as they relate to post combination services will be recorded as operating expense over the remaining service period and were assumed to have no fair value for the purchase price. |
Preliminary Purchase Price Allocation
The total purchase price for Russell Hobbs was allocated to the preliminary net tangible and intangible assets based upon their preliminary fair values at June 16, 2010 as set forth below. The excess of the purchase price over the preliminary net tangible assets and intangible assets was recorded as goodwill. The preliminary allocation of the purchase price was based upon a valuation for which the estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the certain legal matters, amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations, and the final allocation of goodwill. The Company expects to continue to obtain information to assist it in determining the fair values of the net assets acquired at the acquisition date during the measurement period. The preliminary purchase price allocation for Russell Hobbs is as follows:
Current assets |
$ | 307,809 | ||
Property, plant and equipment |
15,150 | |||
Intangible assets |
363,327 | |||
Goodwill(A) |
120,079 | |||
Other assets |
15,752 | |||
Total assets acquired |
$ | 822,117 | ||
Current liabilities |
142,046 | |||
Total debt |
18,970 | |||
Long-term liabilities |
63,522 | |||
Total liabilities assumed |
$ | 224,538 | ||
Net assets acquired |
$ | 597,579 | ||
(A) | Consists of $25,426 of tax deductible Goodwill. |
29
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
Preliminary Pre-Acquisition Contingencies Assumed
The Company has evaluated and continues to evaluate pre-acquisition contingencies relating to Russell Hobbs that existed as of the acquisition date. Based on the evaluation to date, the Company has preliminarily determined that certain pre-acquisition contingencies are probable in nature and estimable as of the acquisition date. Accordingly, the Company has preliminarily recorded its best estimates for these contingencies as part of the preliminary purchase price allocation for Russell Hobbs. The Company continues to gather information relating to all pre-acquisition contingencies that it has assumed from Russell Hobbs. Any changes to the pre-acquisition contingency amounts recorded during the measurement period will be included in the purchase price allocation. Subsequent to the end of the measurement period, any adjustments to pre-acquisition contingency amounts will be reflected in the Companys results of operations.
Certain estimated values are not yet finalized and are subject to change, which could be significant. The Company will finalize the amounts recognized as it obtains the information necessary to complete its analysis during the measurement period. The following items are provisional and subject to change:
| amounts for legal contingencies, pending the finalization of the Companys examination and evaluation of the portfolio of filed cases; |
| amounts for income taxes including deferred tax accounts, amounts for uncertain tax positions, and net operating loss carryforwards inclusive of associated limitations; and |
| the final allocation of Goodwill. |
ASC 805 requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Accordingly, the Company performed a preliminary valuation of the assets and liabilities of Russell Hobbs at June 16, 2010. Significant adjustments as a result of that preliminary valuation are summarized as follows:
| InventoriesAn adjustment of $1,721 was recorded to adjust inventory to fair value. Finished goods were valued at estimated selling prices less the sum of costs of disposal and a reasonable profit allowance for the selling effort. |
| Deferred tax liabilities, netAn adjustment of $43,086 was recorded to adjust deferred taxes for the preliminary fair value allocations. |
| Property, plant and equipment, netAn adjustment of $(455) was recorded to adjust the net book value of property, plant and equipment to fair value giving consideration to their highest and best use. Key assumptions used in the valuation of the Companys property, plant and equipment were based on the cost approach. |
| Certain indefinite-lived intangible assets were valued using a relief from royalty methodology. Customer relationships and certain definite-lived intangible assets were valued using a multi-period excess earnings method. Certain intangible assets are subject to sensitive business factors of which only a portion are within control of the Companys management. The total fair value of indefinite and definite lived intangibles was $363,327 as of June 16, 2010. A summary of the significant key inputs were as follows: |
| The Company valued customer relationships using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the customer relationship, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. Only expected sales from current customers were used, which included an expected growth rate of 3%. The Company assumed a customer retention rate of approximately 93%, which was supported by historical retention rates. Income taxes were estimated at 36% and amounts were discounted using a rate of 15.5%. The customer relationships were valued at $38,000 under this approach. |
| The Company valued trade names and trademarks using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the trade name was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of Russell Hobbs related trademarks and trade names, other similar trademark licensing and transaction agreements and the relative profitability and perceived contribution of the trademarks and trade names. Royalty rates used in the determination of the fair values of trade names and trademarks ranged |
30
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
from 2.0% to 5.5% of expected net sales related to the respective trade names and trademarks. The Company anticipates using the majority of the trade names and trademarks for an indefinite period as demonstrated by the sustained use of each subject trademark. In estimating the fair value of the trademarks and trade names, Net sales for significant trade names and trademarks were estimated to grow at a rate of 1%-14% annually with a terminal year growth rate of 3%. Income taxes were estimated at a range of 30%-38% and amounts were discounted using rates between 15.5%-16.5%. Trade name and trademarks were valued at $170,930 under this approach. |
| The Company valued a trade name license agreement using the income approach, specifically the multi-period excess earnings method. In determining the fair value of the trade name license agreement, the multi-period excess earnings approach values the intangible asset at the present value of the incremental after-tax cash flows attributable only to the trade name license agreement after deducting contributory asset charges. The incremental after-tax cash flows attributable to the subject intangible asset are then discounted to their present value. In estimating the fair value of the trade name license agreement, net sales were estimated to grow at a rate of (3)%-1% annually. The Company assumed a twelve year useful life of the trade name license agreement. Income taxes were estimated at 37% and amounts were discounted using a rate of 15.5%. The trade name license agreement was valued at $149,200 under this approach. |
| The Company valued technology using the income approach, specifically the relief from royalty method. Under this method, the asset value was determined by estimating the hypothetical royalties that would have to be paid if the technology was not owned. Royalty rates were selected based on consideration of several factors, including prior transactions of Russell Hobbs related licensing agreements and the importance of the technology and profit levels, among other considerations. Royalty rates used in the determination of the fair values of technologies were 2% of expected net sales related to the respective technology. The Company anticipates using these technologies through the legal life of the underlying patent and therefore the expected life of these technologies was equal to the remaining legal life of the underlying patents ranging from 9 to 11 years. In estimating the fair value of the technologies, net sales were estimated to grow at a rate of 3%-12% annually. Income taxes were estimated at 37% and amounts were discounted using the rate of 15.5%. The technology assets were valued at $4,100 under this approach. |
Supplemental Pro Forma Information
The following reflects the Companys pro forma results had the results of Russell Hobbs been included for all periods beginning after September 30, 2009.
Three Months | Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales: |
||||||||||||||||
Reported Net sales |
$ | 693,885 | $ | 532,586 | $ | 1,554,952 | $ | 1,124,526 | ||||||||
Russell Hobbs adjustment |
| 157,831 | | 406,520 | ||||||||||||
Pro forma Net sales |
$ | 693,885 | $ | 690,417 | $ | 1,554,952 | $ | 1,531,046 | ||||||||
(Loss) income from continuing operations: |
||||||||||||||||
Reported Loss from continuing operations |
$ | (50,186 | ) | $ | (19,034 | ) | $ | (69,943 | ) | $ | (76,548 | ) | ||||
Russell Hobbs adjustment |
| (414 | ) | | 18,959 | |||||||||||
Pro forma Loss from continuing operations |
$ | (50,186 | ) | $ | (19,448 | ) | $ | (69,943 | ) | $ | (57,589 | ) | ||||
Basic and Diluted (loss) earnings per share from continuing operations(A) : |
||||||||||||||||
Reported Basic and Diluted loss per share from continuing operations |
$ | (0.99 | ) | $ | (0.63 | ) | $ | (1.38 | ) | $ | (2.55 | ) | ||||
Russell Hobbs adjustment |
| (0.02 | ) | | 0.63 | |||||||||||
Pro forma basic and diluted loss per share from continuing operations |
$ | (0.99 | ) | $ | (0.65 | ) | $ | (1.38 | ) | $ | (1.92 | ) | ||||
(A) | The Company has not assumed the exercise of common stock equivalents, as the impact would be antidilutive. |
Seed Resources, LLC
On December 3, 2010, the Company completed the $10,524 cash acquisition of Seed Resources, LLC (Seed Resources). Seed Resources is a wild seed cake producer through its Birdola premium brand seed cakes. This acquisition was not significant individually. In accordance with ASC 805, the Company accounted for the acquisition by applying the acquisition method of accounting. The acquisition method of accounting requires that the consideration transferred in a business combination be measured at fair value as of the closing date of the acquisition.
31
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
The results of Seed Resources operations since December 3, 2010 are included in the Companys Condensed Consolidated Statements of Operations (Unaudited) and are reported as part of the Global Pet Supplies business segment. The preliminary purchase price of $12,500, including a $1,100 trade name intangible asset and $10,029 of goodwill, for this acquisition was based upon a preliminary valuation. The Companys estimates and assumptions for this acquisition are subject to change as the Company obtains additional information for its estimates during the respective measurement period. The primary areas of the purchase price allocation that are not yet finalized relate to certain legal matters, income and non-income based taxes and residual goodwill.
16 | RELATED PARTY TRANSACTIONS |
Merger Agreement and Exchange Agreement
On June 16, 2010 (the Closing Date), SB Holdings completed the Merger pursuant to the Agreement and Plan of Merger, dated as of February 9, 2010, as amended on March 1, 2010, March 26, 2010 and April 30, 2010, by and among SB Holdings, Russell Hobbs, Spectrum Brands, Battery Merger Corp., and Grill Merger Corp. (the Merger Agreement). As a result of the Merger, each of Spectrum Brands and Russell Hobbs became a wholly-owned subsidiary of SB Holdings. At the effective time of the Merger, (i) the outstanding shares of Spectrum Brands common stock were canceled and converted into the right to receive shares of SB Holdings common stock, and (ii) the outstanding shares of Russell Hobbs common stock and preferred stock were canceled and converted into the right to receive shares of SB Holdings common stock.
Pursuant to the terms of the Merger Agreement, on February 9, 2010, Spectrum Brands entered into support agreements with the Harbinger Parties and Avenue International Master, L.P. and certain of its affiliates (the Avenue Parties), in which the Harbinger Parties and the Avenue Parties agreed to vote their shares of Spectrum Brands common stock acquired before the date of the Merger Agreement in favor of the Merger and against any alternative proposal that would impede the Merger.
Immediately following the consummation of the Merger, the Harbinger Parties owned approximately 64% of the outstanding SB Holdings common stock and the stockholders of Spectrum Brands (other than the Harbinger Parties) owned approximately 36% of the outstanding SB Holdings common stock.
On January 7, 2011, the Harbinger Parties contributed 27,757 shares of SB Holdings common stock to Harbinger Group Inc. (HRG) and received in exchange for such shares an aggregate of 119,910 shares of HRG common stock (such transaction, the Share Exchange), pursuant to a Contribution and Exchange Agreement (the Exchange Agreement). Immediately following the Share Exchange, (i) HRG owned approximately 54.4% of the outstanding shares of SB Holdings common stock and the Harbinger Parties owned approximately 12.7% of the outstanding shares of SB Holdings common stock, and (ii) the Harbinger Parties owned 129,860 shares of HRG common stock, or approximately 93.3% of the outstanding HRG common stock.
In connection with the Merger, the Harbinger Parties and SB Holdings entered into a stockholder agreement, dated February 9, 2010 (the Stockholder Agreement), which provides for certain protective provisions in favor of minority stockholders and provides certain rights and imposes certain obligations on the Harbinger Parties, including:
| for so long as the Harbinger Parties and their affiliates beneficially own 40% or more of the outstanding voting securities of SB Holdings, the Harbinger Parties and the Company will cooperate to ensure, to the greatest extent possible, the continuation of the structure of the SB Holdings board of directors as described in the Stockholder Agreement; |
| the Harbinger Parties will not effect any transfer of equity securities of SB Holdings to any person that would result in such person and its affiliates owning 40% or more of the outstanding voting securities of SB Holdings, unless specified conditions are met; and |
| the Harbinger Parties will be granted certain access and informational rights with respect to SB Holdings and its subsidiaries. |
Pursuant to a joinder to the Stockholder Agreement entered into by the Harbinger Parties and HRG, upon consummation of the Share Exchange, HRG became a party to the Stockholder Agreement, and is subject to all of the covenants, terms and conditions of the Stockholder Agreement to the same extent as the Harbinger Parties were bound thereunder prior to giving effect to the Share Exchange.
Certain provisions of the Stockholder Agreement terminate on the date on which the Harbinger Parties or HRG no longer constitutes a Significant Stockholder (as defined in the Stockholder Agreement). The Stockholder Agreement terminates when any person (including the Harbinger Parties or HRG) acquires 90% or more of the outstanding voting securities of SB Holdings.
Also in connection with the Merger, the Harbinger Parties, the Avenue Parties and SB Holdings entered into a registration rights agreement, dated as of February 9, 2010 (the SB Holdings Registration Rights Agreement), pursuant to which the Harbinger Parties
32
SPECTRUM BRANDS HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)-(Continued)
(Amounts in thousands, except per share figures)
and the Avenue Parties have, among other things and subject to the terms and conditions set forth therein, certain demand and so-called piggy back registration rights with respect to their shares of SB Holdings common stock. On September 10, 2010, the Harbinger Parties and HRG entered into a joinder to the SB Holdings Registration Rights Agreement, pursuant to which, effective upon the consummation of the Share Exchange, HRG will become a party to the SB Holdings Registration Rights Agreement, entitled to the rights and subject to the obligations of a holder thereunder.
Other Agreements
On August 28, 2009, in connection with Spectrum Brands emergence from Chapter 11 reorganization proceedings, Spectrum Brands entered into a registration rights agreement with the Harbinger Parties, the Avenue Parties and D.E. Shaw Laminar Portfolios, L.L.C. (D.E. Shaw), pursuant to which the Harbinger Parties, the Avenue Parties and D.E. Shaw have, among other things and subject to the terms and conditions set forth therein, certain demand and so-called piggy back registration rights with respect to their Spectrum Brands 12% Notes.
In connection with the Merger, Russell Hobbs and Harbinger Master Fund entered into an indemnification agreement, dated as of February 9, 2010 (the Indemnification Agreement), by which Harbinger Master Fund agreed, among other things and subject to the terms and conditions set forth therein, to guarantee the obligations of Russell Hobbs to pay (i) a reverse termination fee to Spectrum Brands under the merger agreement and (ii) monetary damages awarded to Spectrum Brands in connection with any willful and material breach by Russell Hobbs of the Merger Agreement. The maximum amount payable by Harbinger Master Fund under the Indemnification Agreement was $50,000 less any amounts paid by Russell Hobbs or the Harbinger Parties, or any of their respective affiliates as damages under any documents related to the Merger. No such amounts became due under the Indemnification Agreement. Harbinger Master Fund also agreed to indemnify Russell Hobbs, SB Holdings and their subsidiaries for out-of-pocket costs and expenses above $3,000 in the aggregate that become payable after the consummation of the Merger and that relate to the litigation arising out of Russell Hobbs business combination transaction with Applica. In February 2011, the parties to the litigation reached a full and final settlement of their disputes. Neither the Company, Applica or any other subsidiary of the Company was required to make any payments in connection with the settlement.
17 | NEW ACCOUNTING PRONOUNCEMENTS |
Revenue Recognition Multiple-Element Arrangements
In October 2009, the Financial Accounting Standards Board issued new accounting guidance addressing the accounting for multiple-deliverable arrangements to enable entities to account for products or services (deliverables) separately rather than as a combined unit. The provisions establish the accounting and reporting guidance for arrangements under which the entity will perform multiple revenue-generating activities. Specifically, this guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The Company adopted the new guidance on October 1, 2010 and the adoption did not impact the Companys financial statements and related disclosures.
33
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Spectrum Brands Holdings, Inc., a Delaware corporation (SB Holdings), is a diversified global branded consumer products company and was created in connection with the combination of Spectrum Brands, Inc. (Spectrum Brands), a global branded consumer products company and Russell Hobbs, Inc. (Russell Hobbs), a global branded small appliance company, to form a new combined company (the Merger). The Merger was consummated on June 16, 2010. As a result of the Merger, both Spectrum Brands and Russell Hobbs are wholly-owned subsidiaries of SB Holdings and Russell Hobbs is a wholly-owned subsidiary of Spectrum Brands. SB Holdings common stock trades on the New York Stock Exchange (the NYSE) under the symbol SPB.
In connection with the Merger, we refinanced Spectrum Brands existing senior debt, except for Spectrum Brands 12% Senior Subordinated Toggle Notes due 2019 (the 12% Notes), which remain outstanding, and a portion of Russell Hobbs existing senior debt through a combination of a new $750 million Term Loan due June 16, 2016 (the Term Loan), new $750 million 9.5% Senior Secured Notes maturing June 15, 2018 (the 9.5% Notes) and a new $300 million ABL revolving facility due June 16, 2014 (the ABL Revolving Credit Facility. The Term Loan was subsequently refinanced in February 2011, and the ABL Revolving Credit Facility was amended in April 2011. See Liquidity and Capital Resources, Financing Activities below, as well as Note 7, Debt, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our outstanding debt.
As further described below, on February 3, 2009, we and our wholly owned U.S. subsidiaries (collectively, the Debtors) filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the Bankruptcy Code), in the U.S. Bankruptcy Court for the Western District of Texas (the Bankruptcy Court). On August 28, 2009 (the Effective Date), the Debtors emerged from Chapter 11 of the Bankruptcy Code. Effective as of the Effective Date and pursuant to the Debtors confirmed plan of reorganization, we converted from a Wisconsin corporation to a Delaware corporation.
Unless the context indicates otherwise, the terms the Company, Spectrum, we, our or us are used to refer to SB Holdings and its subsidiaries subsequent to the Merger and Spectrum Brands prior to the Merger, as well as before, on and after the Effective Date. The term Old Spectrum refers only to Spectrum Brands, our Wisconsin predecessor, and its subsidiaries prior to the Effective Date.
Business Overview
We are a diversified global branded consumer products company with positions in seven major product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming products; small appliances; electric personal care products; and portable lighting.
Effective October 1, 2010, our chief operating decision-maker decided to manage the businesses in three vertically integrated, product-focused reporting segments: (i) Global Batteries & Appliances, which consists of our worldwide battery, electric shaving and grooming, electric personal care, portable lighting business and small appliances primarily in the kitchen and home product categories (Global Batteries & Appliances); (ii) Global Pet Supplies, which consists of our worldwide pet supplies business (Global Pet Supplies); and (iii) Home and Garden Business, which consists of our home and garden and insect control business (the Home and Garden Business). The current reporting segment structure reflects the combination of the former Global Batteries & Personal Care segment (Global Batteries & Personal Care), which consisted of the worldwide battery, electric shaving and grooming, electric personal care and portable lighting business, with substantially all of the former Small Appliances segment (Small Appliances), which consisted of the Russell Hobbs businesses acquired on June 16, 2010, to form the Global Batteries & Appliances segment. In addition, certain pest control and pet products included in the former Small Appliances segment have been reclassified into the Home and Garden Business and Global Pet Supplies segments, respectively. The presentation of all historical segment reporting herein has been changed to conform to this segment reporting.
We manufacture and market alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides and repellants and specialty pet supplies. We design and market rechargeable batteries, battery-powered lighting products, electric shavers and accessories, grooming products and hair care appliances. With the addition of Russell Hobbs we design, market and distribute a broad range of branded small household appliances and personal care products. Our manufacturing and product development facilities are located in the United States, Europe, Latin America and Asia. Substantially all of our rechargeable batteries and chargers, shaving and grooming products, small household appliances, personal care products and portable lighting products are manufactured by third-party suppliers, primarily located in Asia.
We sell our products in approximately 120 countries through a variety of trade channels, including retailers, wholesalers and distributors, hearing aid professionals, industrial distributors and original equipment manufacturers (OEMs) and enjoy strong name recognition in our markets under the Rayovac, VARTA and Remington brands, each of which has been in existence for more than 80 years, and under the Tetra, 8-in-1, Spectracide, Cutter, Black & Decker, George Foreman, Russell Hobbs, Farberware and various other brands.
34
Global and geographic strategic initiatives and financial objectives are determined at the corporate level. Each business segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for sales and marketing initiatives and the financial results for all product lines within that business segment.
Our operating performance is influenced by a number of factors including: general economic conditions; foreign exchange fluctuations; trends in consumer markets; consumer confidence and preferences; our overall product line mix, including pricing and gross margin, which vary by product line and geographic market; pricing of certain raw materials and commodities; energy and fuel prices; and our general competitive position, especially as impacted by our competitors advertising and promotional activities and pricing strategies.
Results of Operations
Fiscal Quarter and Fiscal Six Month Period Ended April 3, 2011 Compared to Fiscal Quarter and Fiscal Six Month Period Ended April 4, 2010
In this Quarterly Report on Form 10-Q we refer to the three months ended April 3, 2011 as the Fiscal 2011 Quarter, the six month period ended April 3, 2011 as the Fiscal 2011 Six Months, the three month period ended April 4, 2010 as the Fiscal 2010 Quarter and the six month period ended April 4, 2010 as the Fiscal 2010 Six Months.
Net Sales. Net sales for the Fiscal 2011 Quarter increased to $694 million from $533 million in the Fiscal 2010 Quarter, a 30% increase. The following table details the principal components of the change in net sales from the Fiscal 2010 Quarter to the Fiscal 2011 Quarter (in millions):
Net Sales | ||||
Fiscal 2010 Quarter Net Sales |
$ | 533 | ||
Addition of Russell Hobbs as a result of the Merger |
158 | |||
Increase in home and garden control products |
13 | |||
Increase in electric personal care products |
8 | |||
Increase in electric shaving and grooming products |
3 | |||
Decrease in consumer batteries |
(11 | ) | ||
Decrease in pet supplies |
(8 | ) | ||
Decrease in portable lighting products |
(4 | ) | ||
Foreign currency impact, net |
2 | |||
Fiscal 2011 Quarter Net Sales |
$ | 694 | ||
Net sales for the Fiscal 2011 Six Months increased to $1,555 million from $1,125 million in the Fiscal 2010 Six Months, a 38% increase. The following table details the principal components of the change in net sales from the Fiscal 2010 Six Months to the Fiscal 2011 Six Months (in millions):
Net Sales | ||||
Fiscal 2010 Six Months Net Sales |
$ | 1,125 | ||
Addition of Russell Hobbs as a result of the Merger |
406 | |||
Increase in electric personal care products |
17 | |||
Increase in electric shaving and grooming products |
15 | |||
Increase in home and garden control products |
13 | |||
Increase in consumer batteries |
2 | |||
Decrease in pet supplies |
(11 | ) | ||
Foreign currency impact, net |
(12 | ) | ||
Fiscal 2011 Six Months Net Sales |
$ | 1,555 | ||
Consolidated net sales by product line for the Fiscal 2011 Quarter, the Fiscal 2010 Quarter, the Fiscal 2011 Six Months and the Fiscal 2010 Six Months are as follows (in millions):
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Product line net sales |
||||||||||||||||
Addition of Russell Hobbssmall appliances |
$ | 154 | $ | | $ | 397 | $ | | ||||||||
Addition of Russell Hobbspet supplies |
3 | | 8 | | ||||||||||||
Addition of Russell Hobbshome and garden control products |
1 | | 2 | | ||||||||||||
Consumer batteries |
180 | 190 | 429 | 434 | ||||||||||||
Pet supplies |
141 | 148 | 274 | 285 | ||||||||||||
Electric shaving and grooming products |
52 | 49 | 149 | 136 |
35
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Electric personal care products |
56 | 48 | 138 | 124 | ||||||||||||
Home and garden control products |
89 | 76 | 115 | 102 | ||||||||||||
Portable lighting products |
18 | 22 | 43 | 44 | ||||||||||||
Total net sales to external customers |
$ | 694 | $ | 533 | $ | 1,555 | $ | 1,125 | ||||||||
Global consumer battery sales decreased $10 million, or 5%, during the Fiscal 2011 Quarter primarily driven by decreased Latin America sales of $8 million. The decrease within Latin America was driven by lower zinc carbon battery sales of $6 million and lower alkaline sales of $2 million. The decrease in both zinc carbon and alkaline battery sales was predominantly driven by decreased volume and price in Brazil. The $7 million, or 5%, decrease in pet supplies sales during the Fiscal 2011 Quarter was primarily attributable to continued softness in the aquatics business due to macroeconomic factors. During the Fiscal 2011 Quarter, electric shaving and grooming products increased $3 million, or 6%, primarily due to increased sales within Europe as a result of successful new product launches. Electric personal care sales increased $8 million, or 18%, during the Fiscal 2011 Quarter, primarily due to increased sales in North America as a result of new product introductions, product line expansions and in-store promotions. Home and garden control product sales increased $13 million, or 17%, during the Fiscal 2011 Quarter compared to the Fiscal 2010 Quarter. The increase is primarily attributable to increased distribution and product placements with major customers. The $4 million, or 19%, decrease in portable lighting sales during the Fiscal 2011 Quarter was primarily driven by the timing of promotions at a major customer that occurred during our Fiscal 2010 Quarter and the first quarter of our fiscal year ending September 30, 2011.
Global consumer battery sales decreased $5 million, or 1%, during the Fiscal 2011 Six Months, primarily driven by lower Latin America sales of $8 million, decreased European sales of $3 million and unfavorable foreign exchange translation of $8 million. Latin America sales decreased due to the factors discussed in the Fiscal 2011 Quarter while the decrease in European sales was due to continued movement away from the private label market. These decreases were tempered by increases within North America of $13 million as a result of increased sales with a major customer during our first fiscal quarter. The $11 million, or 4%, decrease in pet supplies sales during the Fiscal 2011 Six Months is primarily attributable to the same factors mentioned above during the Fiscal 2011 Quarter. During the Fiscal 2011 Six Months, electric shaving and grooming products increased $13 million, or 10%, primarily due to increased sales within North America and Europe of $5 million and $8 million, respectively, as a result of successful new product launches. Electric personal care sales increased $14 million, or 12%, during the Fiscal 2011 Six Months, primarily due to increased sales in North America and Europe of $4 million and $12 million, respectively. Home and garden control product sales increased $13 million, or 13%, during the Fiscal 2011 Six Months compared to the Fiscal 2010 Six Months. The increase was attributable to the same factors mentioned above during the Fiscal 2011 Quarter. Portable lighting products sales decreased slightly to $43 million during the Fiscal 2011 Six Months compared to $44 million during the Fiscal 2010 Six Months. We expect total net sales, adjusted to include prior year Russell Hobbs sales, to grow 3% to 4 in our fiscal year ending September 30, 2011 (Fiscal 2011), driven by a strong second half performance, including new distribution gains and products placements in the Global Pet Supplies and Home and Garden segments and continued strength in the global personal care category.
Gross Profit. Gross profit for the Fiscal 2011 Quarter was $255 million versus $210 million for the Fiscal 2010 Quarter. Our gross profit margin for the Fiscal 2011 Quarter decreased to 36.8% from 39.4% in the Fiscal 2010 Quarter. The increase in gross profit is primarily attributable to the Merger, which contributed $39 million of gross profit in the Fiscal 2011 Quarter. The decrease in gross profit margin is attributable to the change in overall product mix as a result of the Merger. Gross profit for the Fiscal 2011 Six Months was $555 million versus $394 million for the Fiscal 2010 Six Months. Our gross profit margin increased to 35.7% from 35.0% in the Fiscal 2010 Six Months. The increase in gross profit for the Fiscal 2011 Six Months is also attributable to the Merger, which contributed $111 million during the Fiscal 2011 Six Months, coupled with the non-recurrence of a $34 million inventory revaluation charge we recognized associated with our adoption of fresh-start reporting upon emergence from Chapter 11 of the Bankruptcy Code. Inventory balances were revalued at August 30, 2009 resulting in an increase in such inventory balances of $49 million. As a result of the inventory revaluation, we recognized $34 million in additional cost of goods sold during the Fiscal 2010 Six Months. The increase in gross profit margin is also attributable to the non-recurrence of the inventory revaluation charge recognized in the Fiscal 2010 Six Months, which was partially offset by the factors mentioned above regarding the decline in gross profit margin during the Fiscal 2011 Quarter.
Operating Expense. Operating expenses for the Fiscal 2011 Quarter totaled $208 million versus $164 million for the Fiscal 2010 Quarter representing an increase of $44 million. The increase in operating expenses during the Fiscal 2011 Quarter is primarily attributable to the Merger, which contributed $30 million of operating expenses in the Fiscal 2011 Quarter. Also contributing to the increase in Operating expenses during the Fiscal 2011 Quarter was Acquisition and integration related charges of $8 million compared to $3 million during the Fiscal 2010 Quarter. Operating expenses for the Fiscal 2011 Six Months totaled $438 million versus $330 million for the Fiscal 2010 Six Months, representing an increase of $108 million. The increase in operating expenses during the Fiscal 2011 Six Months is also primarily attributable to the Merger, which contributed $76 million of operating expenses in the Fiscal 2011 Quarter. Also contributing to the increase in operating expenses was a $19 million increase in Acquisition and integration related charges, which primarily related to the Merger. See Acquisition and Integration Related Charges below, as well as Note 2,
36
Significant Accounting PoliciesAcquisition and Integration Related Charges, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our acquisition and integration related charges.
Segment Results. As discussed above, we manage our business in three reportable segments: (i) Global Batteries & Appliances; (ii) Global Pet Supplies; and (iii) our Home and Garden Business.
The operating segment profits do not include restructuring and related charges, acquisition and integration related charges, reorganization items expense, net, interest expense, interest income and income tax expense. In connection with the realignment of reportable segments discussed above, as of October 1, 2010, certain general and administrative expenses necessary to reflect the operating segments on a standalone basis and that were previously reflected in operating segment profits, have been excluded in the determination of reportable segment profits. Accordingly, corporate expenses primarily include general and administrative expenses and global long-term incentive compensation plans costs which are evaluated on a consolidated basis and not allocated to our operating segments. Costs are identified to operating segments or corporate expense according to the function of each cost center.
All depreciation and amortization included in income from operations is related to operating segments or corporate expense. Costs are allocated to operating segments or corporate expense according to the function of each cost center. All capital expenditures are related to operating segments. Variable allocations of assets are not made for segment reporting.
Global strategic initiatives and financial objectives for each reportable segment are determined at the corporate level. Each reportable segment is responsible for implementing defined strategic initiatives and achieving certain financial objectives and has a general manager responsible for the sales and marketing initiatives and financial results for product lines within that segment. Financial information pertaining to our reportable segments is contained in Note 12, Segment Results, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q.
Adjusted EBITDA is a metric used by management and frequently used by the financial community, which provides insight into an organizations operating trends and facilitates comparisons between peer companies, since interest, taxes, depreciation and amortization can differ greatly between organizations as a result of differing capital structures and tax strategies. Adjusted EBITDA can also be a useful measure of a companys ability to service debt and is one of the measures used for determining our debt covenant compliance. Adjusted EBITDA excludes certain items that are unusual in nature or not comparable from period to period. While we believe that Adjusted EBITDA is useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.
Below is a reconciliation of GAAP Net Income (Loss) to Adjusted EBITDA by segment for the Fiscal 2011 Quarter, Fiscal 2011 Six Months, the Fiscal 2010 Quarter and Fiscal 2010 Six Months:
Fiscal 2011 Quarter |
||||||||||||||||||||
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Corporate
/ Unallocated Items(a) |
Consolidated SB Holdings |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Net Income (loss) |
$ | 36 | $ | 14 | $ | 14 | $ | (114 | ) | $ | (50 | ) | ||||||||
Income tax expense |
| | | 25 | 25 | |||||||||||||||
Interest expense |
| | | 72 | 72 | |||||||||||||||
Restructuring and related charges |
| 3 | 1 | 1 | 5 | |||||||||||||||
Acquisition and integration related charges |
5 | 1 | | 2 | 8 | |||||||||||||||
Other |
(1 | ) | | | | (1 | ) | |||||||||||||
Adjusted EBIT |
$ | 40 | $ | 18 | $ | 15 | $ | (14 | ) | $ | 59 | |||||||||
Depreciation and amortization |
17 | 6 | 3 | 8 | 34 | |||||||||||||||
Adjusted EBITDA |
$ | 57 | $ | 24 | $ | 18 | $ | (6 | ) | $ | 93 | |||||||||
37
Fiscal 2011 Six Months |
||||||||||||||||||||
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Corporate
/ Unallocated Items(a) |
Consolidated SB Holdings |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Net Income (loss) |
$ | 115 | $ | 28 | $ | 7 | $ | (220 | ) | $ | (70 | ) | ||||||||
Income tax expense |
| | | 60 | 60 | |||||||||||||||
Interest expense |
| | | 126 | 126 | |||||||||||||||
Restructuring and related charges |
1 | 6 | 1 | 3 | 11 | |||||||||||||||
Acquisition and integration related charges |
19 | 1 | | 4 | 24 | |||||||||||||||
Other |
(1 | ) | | | | (1 | ) | |||||||||||||
Adjusted EBIT |
$ | 134 | $ | 35 | $ | 8 | $ | (27 | ) | $ | 150 | |||||||||
Depreciation and amortization |
34 | 11 | 6 | 15 | 66 | |||||||||||||||
Adjusted EBITDA |
$ | 168 | $ | 46 | $ | 14 | $ | (12 | ) | $ | 216 | |||||||||
Fiscal 2010 Quarter |
||||||||||||||||||||
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Corporate
/ Unallocated Items(a) |
Consolidated SB Holdings |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Net Income (loss) |
$ | 28 | $ | 18 | $ | 9 | $ | (74 | ) | $ | (19 | ) | ||||||||
Income tax expense |
| | | 10 | 10 | |||||||||||||||
Interest expense |
| | | 48 | 48 | |||||||||||||||
Pre-acquisition earnings of Russell Hobbs |
14 | 2 | | | 16 | |||||||||||||||
Restructuring and related charges |
1 | 1 | 2 | 1 | 5 | |||||||||||||||
Other |
| | | 3 | 3 | |||||||||||||||
Adjusted EBIT |
$ | 43 | $ | 21 | $ | 11 | $ | (12 | ) | $ | 63 | |||||||||
Depreciation and amortization |
13 | 7 | 4 | 4 | 28 | |||||||||||||||
Adjusted EBITDA |
$ | 56 | $ | 28 | $ | 15 | $ | (8 | ) | $ | 91 | |||||||||
Fiscal 2010 Six Months |
||||||||||||||||||||
Global Batteries & Appliances |
Global Pet Supplies |
Home and Garden Business |
Corporate
/ Unallocated Items(a) |
Consolidated SB Holdings |
||||||||||||||||
(in millions) | ||||||||||||||||||||
Net Income (loss) |
$ | 75 | $ | 19 | $ | (9 | ) | $ | (164 | ) | $ | (79 | ) | |||||||
Loss from discontinued operations, net of tax |
| | 3 | | 3 | |||||||||||||||
Income tax expense |
| | | 33 | 33 | |||||||||||||||
Interest expense |
| | | 98 | 98 | |||||||||||||||
Pre-acquisition earnings of Russell Hobbs |
48 | 2 | 1 | | 51 | |||||||||||||||
Restructuring and related charges |
1 | 3 | 7 | | 11 | |||||||||||||||
Reorganization expense items, net |
| | | 4 | 4 | |||||||||||||||
Fresh-start inventory and other fair value adjustment |
19 | 13 | 2 | | 34 | |||||||||||||||
Acquisition and integration related charges |
| | | 5 | 5 | |||||||||||||||
Brazilian IPI credit/other |
(5 | ) | | | | (5 | ) | |||||||||||||
Adjusted EBIT |
$ | 138 | $ | 37 | $ | 4 | $ | (24 | ) | $ | 155 | |||||||||
Depreciation and amortization |
25 | 14 | 7 | 7 | 53 | |||||||||||||||
Adjusted EBITDA |
$ | 163 | $ | 51 | $ | 11 | $ | (17 | ) | $ | 208 | |||||||||
(a) | It is our policy to record Income tax expense and interest expense on a consolidated basis. Accordingly, such amounts are not reflected in the operating results of the operating segments. |
38
Global Batteries & Appliances
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net sales to external customers |
$ | 459 | $ | 308 | $ | 1,156 | $ | 737 | ||||||||
Segment profit |
$ | 42 | $ | 35 | $ | 135 | $ | 83 | ||||||||
Segment profit as a % of net sales |
9.1 | % | 11.5 | % | 11.7 | % | 11.3 | % | ||||||||
Segment Adjusted EBITDA |
57 | 57 | 168 | 163 | ||||||||||||
Assets as of April 3, 2011 and September 30, 2010 |
$ | 2,328 | $ | 2,477 | $ | 2,328 | $ | 2,477 |
Segment sales to external customers in the Fiscal 2011 Quarter increased $151 million to $459 million from $308 million during the Fiscal 2010 Quarter, a 49% increase. The Merger accounted for a sales increase of $154 million in the small appliances product category during the Fiscal 2011 Quarter. Favorable foreign currency exchange translation slightly impacted sales of Global Batteries & Appliances during the Fiscal 2011 Quarter by approximately $2 million. Consumer battery sales for the Fiscal 2011 Quarter decreased to $180 million when compared to sales of $190 million in the Fiscal 2010 Quarter. The decrease in sales is primarily attributable to a reduction of Latin American zinc carbon battery sales of $6 million and alkaline battery sales of $3 million which was predominantly driven by decreased volume and price in Brazil. Sales of electric shaving and grooming products in the Fiscal 2011 Quarter increased by $3 million from their levels in the Fiscal 2010 Quarter, primarily due to increases within Europe. Sales of electric personal care products in the Fiscal 2011 Quarter increased by $8 million compared to the Fiscal 2010 Quarter due to increased sales in North America and Europe of $6 million and $2 million, respectively. The electric shaving and grooming and personal care products net sales growth was attributable to a combination of new product introductions, product line extensions and expanded in-store promotions. Sales of portable lighting products for the Fiscal 2011 Quarter decreased to $18 million as compared to sales of $22 million for the Fiscal 2010 Quarter, primarily driven by timing of promotions at a major customer that occurred during our Fiscal 2010 Quarter and the first quarter of our fiscal year ending September 30, 2011. Segment sales to external customers in the Fiscal 2011 Six Months increased $419 million to $1,156 million from $737 million during the Fiscal 2010 Six Months, a 57% increase. The Merger accounted for a sales increase of $397 million in the small appliances product category during the Fiscal 2011 Six Months. Unfavorable foreign currency exchange translation impacted sales of Global Batteries & Appliances during the Fiscal 2011 Six Months by approximately $11 million. Consumer battery sales for the Fiscal 2011 Six Months decreased slightly to $429 million when compared to sales of $434 million in the Fiscal 2010 Six Months. While we experienced increased sales of alkaline batteries in North America during the Fiscal 2011 Six Months, these increases were more than offset by unfavorable foreign exchange translation of $8 million coupled with decreased sales in Latin America during the Fiscal 2011 Quarter which is discussed above. Sales of electric shaving and grooming products in the Fiscal 2011 Six Months increased by $13 million from their levels in the Fiscal 2010 Six Months primarily due to increases within North America and Europe of $5 million and $8 million, respectively. Sales of electric personal care products in the Fiscal 2011 Six Months increased by $14 million compared to the Fiscal 2010 Six Months due to increased sales in North America and Europe of $4 million and $12 million, respectively. The electronic shaving and grooming products and electronic personal care products sales growth was attributable to the factors mentioned above for the Fiscal 2011 Quarter sales increase. Sales of portable lighting products for the Fiscal 2011 Six Months decreased slightly to $43 million as compared to sales of $44 million for the Fiscal 2010 Six Months.
Segment profitability in the Fiscal 2011 Quarter increased to $42 million from $35 million in the Fiscal 2010 Quarter. The increase during the Fiscal 2011 Quarter is due to the segment profit realized from the Merger of $7 million. Segment profitability as a percentage of sales in the Fiscal 2011 Quarter decreased to 9.1% from 11.5% in the same period last year due to the change in overall product mix as a result of the Merger. Segment profitability during the Fiscal 2011 Six Months increased to $135 million from $83 million in the Fiscal 2010 Six Months due to segment profits realized from the Merger of $30 million and the non-recurrence of a $19 million increase in cost of goods sold due to the revaluation of inventory in connection with our adoption of fresh-start reporting upon emergence from Chapter 11 of the Bankruptcy Code that we recognized during the Fiscal 2010 Six Months. Segment profitability as a percentage of sales in the Fiscal 2011 Six Months increased to 11.7% from 11.3% during the Fiscal 2010 Six Months due to the previously mentioned non-recurring increase in cost of goods sold resulting from the revaluation of inventory in the Fiscal 2010 Six Months, which was tempered by the decrease of segment profitability previously mentioned for the Fiscal 2011 Quarter.
Segment Adjusted EBITDA in the Fiscal 2011 Quarter was $57 million compared to $56 million in the Fiscal 2010 Quarter. Segment Adjusted EBITDA in the Fiscal 2011 Six Months was $168 million compared to $163 million in the Fiscal 2010 Six Months. The increases in both the Fiscal 2011 Quarter and Fiscal 2011 Six Months Adjusted EBITDA is mainly driven by the efficient cost structure now in place from our cost reduction initiatives announced in Fiscal 2009 coupled with increases in market share in certain of our product categories.
Segment assets at April 3, 2011 decreased to $2,328 million from $2,477 million at September 30, 2010. Goodwill and intangible assets, which are directly a result of the revaluation impacts of fresh-start reporting and the Merger, at April 3, 2011 decreased slightly to $1,351 million from $1,355 million at September 30, 2010.
39
Global Pet Supplies
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net sales to external customers |
$ | 144 | $ | 148 | $ | 281 | $ | 285 | ||||||||
Segment profit |
$ | 18 | $ | 19 | $ | 34 | $ | 20 | ||||||||
Segment profit as a % of net sales |
12.8 | % | 13.0 | % | 12.3 | % | 7.2 | % | ||||||||
Segment Adjusted EBITDA |
24 | 28 | 46 | 51 | ||||||||||||
Assets as of April 3, 2011 and September 30, 2010 |
$ | 869 | $ | 839 | $ | 869 | $ | 839 |
Segment sales to external customers in the Fiscal 2011 Quarter were $144 million compared to $148 million during the Fiscal 2010 Quarter. The Merger accounted for sales of $3 million during the Fiscal 2011 Quarter. Excluding the Merger, sales decreased $7 million during the Fiscal 2011 Quarter as a result of continued softness in the aquatics category due to macroeconomic factors. Segment sales to external customers in the Fiscal 2011 Six Months were $281 million compared to $285 million during the Fiscal 2010 Six Months. The Merger accounted for sales of $8 million during the Fiscal 2011 Six Months. Excluding the Merger, sales decreased $12 million as a result of the factors mentioned above for the Fiscal 2011 Quarter decline. We expect strong second half performance during Fiscal 2011 within Global Pet Supplies, driven by new distribution gains and product placements.
Segment profitability in the Fiscal 2011 Quarter was $18 million versus $19 million in the Fiscal 2010 Quarter. Segment profitability as a percentage of sales in the Fiscal 2011 Quarter decreased to 12.8% from 13.0% in the same period last year. The slight decrease in segment profitability for the Fiscal 2011 Quarter was mainly attributed to the previously mentioned lower sales volume as well as product mix, which was slightly offset by the efficient cost structure now in place from our cost reduction initiatives announced in Fiscal 2009. Segment profitability in the Fiscal 2011 Six Months was $34 million versus $20 million in the Fiscal 2010 Six Months. Segment profitability as a percentage of sales in the Fiscal 2011 Six Months increased to 12.3% versus 7.2% in the Fiscal 2010 Six Months. This was primarily attributable to the non-recurrence of a $14 million increase in cost of goods sold due an inventory revaluation charge associated with our adoption of fresh-start reporting that we recognized during our first quarter of our fiscal year ended September 30, 2010.
Segment Adjusted EBITDA in the Fiscal 2011 Quarter was $24 million compared to $28 million in the Fiscal 2010 Quarter. Segment Adjusted EBITDA in the Fiscal 2011 Six Months was $46 million compared to $51 million in the Fiscal 2010 Six Months. The decline in both the Fiscal 2011 Quarter and the Fiscal 2011 Six Months Adjusted EBITDA is driven by the previously mentioned product mix.
Segment assets at April 3, 2011 increased to $869 million from $839 million at September 30, 2010. The increase is primarily due to the acquisition of Seed Resources, LLC during the Fiscal 2011 Six Months, and the impact of favorable foreign currency translation. Goodwill and intangible assets, which are directly a result of the revaluation impacts of fresh-start reporting, the Merger and the acquisition of Seed Resources, LLC increased slightly to $615 million at April 3, 2011 from $602 million at September 30, 2010.
40
Home and Garden Business
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(in millions) | ||||||||||||||||
Net sales to external customers |
$ | 90 | $ | 76 | $ | 118 | $ | 102 | ||||||||
Segment profit |
$ | 15 | $ | 11 | $ | 8 | $ | 1 | ||||||||
Segment profit as a % of net sales |
16.5 | % | 14.4 | % | 6.9 | % | 1.4 | % | ||||||||
Segment Adjusted EBITDA |
18 | 15 | 14 | 11 | ||||||||||||
Assets as of April 3, 2011 and September 30, 2010 |
$ | 553 | $ | 496 | $ | 553 | $ | 496 |
Segment sales to external customers in the Fiscal 2011 Quarter increased to $90 million from $76 million in the Fiscal 2010 Quarter. The Merger accounted for a sales increase of $1 million during the Fiscal 2011 Quarter. The remaining $13 million of increased sales is primarily attributable to increased distribution with major customers. Segment sales to external customers in the Fiscal 2011 Six Months increased to $118 million from $102 million in the Fiscal 2010 Six Months. The increase is due to the factors mentioned above that contributed to the increase during the Fiscal 2011 Quarter. We expect strong second half performance during Fiscal 2011 within Home and Garden, driven by new distribution gains and product placements.
Segment profitability in the Fiscal 2011 Quarter increased to $15 million from $11 million in the Fiscal 2010 Quarter. Segment profitability as a percentage of sales in the Fiscal 2011 Quarter increased to 16.5% from 14.4% in the same period last year. This improvement in segment profitability is attributed to the increase in sales coupled with the efficient cost structure now in place from our cost reduction initiatives announced in Fiscal 2009. Segment profitability in the Fiscal 2011 Six Months increased to $8 million from $1 million in the Fiscal 2010 Six Months. Segment profitability as a percentage of sales in the Fiscal 2011 Six Months increased to 6.9% from 1.4% in the same period last year. This improvement in segment profitability was attributable to the non-recurrence of a $2 million increase in cost of goods sold due to an inventory revaluation charge associated with our adoption of fresh-start reporting that we recognized during the first quarter of our fiscal year ended September 30, 2010 coupled with the factors mentioned above that contributed to the improvement during the Fiscal 2011 Quarter.
Segment Adjusted EBITDA for both the Fiscal 2011 Quarter was $18 million compared to $15 million during the Fiscal 2010 Quarter of $15 million. Segment Adjusted EBITDA for the Fiscal 2011 Six Months was $14 million compared to $11 million during the Fiscal 2010 Six Months. The increase during both the Fiscal 2011 Six Months and the Fiscal 2011 Quarter was driven by the increased sales volume as described above.
Segment assets at April 3, 2011 increased to $553 million from $496 million at September 30, 2010, mainly driven by seasonal increases in inventory. Goodwill and intangible assets, which are substantially a direct a result of the revaluation impacts of fresh-start reporting, at April 3, 2011 decreased slightly to $409 million from $413 million at September 30, 2010.
Corporate Expense. Our corporate expense in the Fiscal 2011 Quarter was $15 million compared to $11 million during the Fiscal 2010 Quarter. This increase is attributable to a $5 million increase in stock compensation expense during the Fiscal 2011 Quarter compared to the Fiscal 2010 Quarter. Corporate expense as a percentage of consolidated net sales for the Fiscal 2011 Quarter was 2.2% and 2.1% during the Fiscal 2010 Quarter. Our corporate expense during the Fiscal 2011 Six Months was $27 million compared to $23 million during the Fiscal 2010 Six Months. This increase is attributable to a $9 million increase in stock compensation expense during the Fiscal 2011 Six Months compared to the Fiscal 2010 Six Months, partially offset by savings resulting from the relocation of the corporate office back to Madison, Wisconsin. Corporate expense as a percentage of consolidated net sales for the Fiscal 2011 Six Months was 1.7% compared to 2.1% during the Fiscal 2010 Six Months.
Acquisition and Integration and Related Charges. Acquisition and integration related charges reflected in Operating expenses include, but are not limited to, transaction costs such as banking, legal and accounting professional fees directly related to the acquisition, termination and related costs for transitional and certain other employees, integration related professional fees and other post business combination related expenses associated with our acquisitions.
We incurred $8 million of Acquisition and integration related charges during the Fiscal 2011 Quarter in connection with the Merger which consisted of the following: (i) $1 million of legal and professional fees; (ii) $1 million of employee termination charges; and (iii) $6 million of integration costs. We incurred $3 million of Acquisition and integration related charges during the Fiscal 2010 Quarter in connection with the Merger, which consisted of legal and professional fees. We incurred $24 million of Acquisition and integration related charges during the Fiscal 2011 Six Months in connection with the Merger, which consisted of the following: (i) $4 million of legal and professional fees; (ii) $5 million of employee termination charges; and (iii) $15 million of integration costs. We incurred $5 million of Acquisition and integration related charges during the Fiscal 2010 Six Months in connection with the Merger which consisted of legal and professional fees.
41
The Company incurred di minimis acquisition and integration related charges associated with the acquisition of Seed Resources, LLC during the Fiscal 2011 Six Months.
Restructuring and Related Charges. See Note 13, Restructuring and Related Charges, to our Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for additional information regarding our restructuring and related charges.
The following table summarizes all restructuring and related charges we incurred in the Fiscal 2011 Quarter, the Fiscal 2010 Quarter, the Fiscal 2011 Six Months and the Fiscal 2010 Six Months (in millions):
Fiscal Quarter | Fiscal Six Months | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Costs included in cost of goods sold: |
||||||||||||||||
Latin American Initiatives: |
||||||||||||||||
Termination benefits |
| | | 0.2 | ||||||||||||
Other associated costs |
| (0.1 | ) | | (0.1 | ) | ||||||||||
Ningbo Exit Plan: |
||||||||||||||||
Other associated costs |
0.2 | 0.6 | 0.1 | 1.2 | ||||||||||||
Global Cost Reduction Initiatives: |
||||||||||||||||
Termination benefits |
1.0 | 1.1 | 1.1 | 1.3 | ||||||||||||
Other associated costs |
0.8 | 0.4 | 1.4 | 1.0 | ||||||||||||
Total included in cost of goods sold |
2.0 | 2.0 | 2.6 | 3.6 | ||||||||||||
Costs included in operating expenses: |
||||||||||||||||
Global Realignment Initiatives: |
||||||||||||||||
Termination benefits |
0.1 | 1.2 | 1.2 | | ||||||||||||
Other associated costs |
0.4 | | 1.3 | (1.0 | ) | |||||||||||
Global Cost Reduction Initiatives: |
||||||||||||||||
Termination benefits |
0.7 | 1.1 | 2.9 | 1.8 | ||||||||||||
Other associated costs |
1.9 | 1.1 | 2.7 | 7.4 | ||||||||||||
Total included in operating expenses |
3.1 | 3.4 | 8.1 | 8.2 | ||||||||||||
Total restructuring and related charges |
$ | 5.1 | $ | 5.4 | $ | 10.7 | $ | 11.8 | ||||||||
In Fiscal 2007, we began managing our business in three vertically integrated, product-focused reporting segments; Global Batteries & Personal Care (which, effective October 1, 2010, includes the appliance portion of Russell Hobbs, collectively, Global Batteries & Appliances), Global Pet Supplies and the Home and Garden Business. As part of this realignment, our global operations organization, which had previously been included in corporate expense, consisting of research and development, manufacturing management, global purchasing, quality operations and inbound supply chain, is now included in each of the operating segments. In connection with these changes we undertook a number of cost reduction initiatives, primarily headcount reductions, at the corporate and operating segment levels (the Global Realignment Initiatives). We recorded approximately $1 million of pretax restructuring and related charges during both the Fiscal 2011 Quarter and the Fiscal 2010 Quarter, respectively, in connection with the Global Realignment Initiatives. We recorded approximately $3 million and $(1) million of pretax restructuring and related charges during the Fiscal 2011 Six Months and Fiscal 2010 Six Months, respectively, in connection with the Global Realignment Initiatives. Costs associated with these initiatives, which are expected to be incurred through June 30, 2013, relate primarily to severance and are projected at approximately $92 million.
During Fiscal 2008, we implemented an initiative within the Global Batteries & Appliances segment to reduce operating costs and rationalize our manufacturing structure. These initiatives, which are substantially complete, include the exit of our battery manufacturing facility in Ningbo, China (Ningbo) (the Ningbo Exit Plan). We recorded de minimis pretax restructuring and related charges during the Fiscal 2011 Quarter and Fiscal 2011 Six Months and approximately $1 million of pretax restructuring and related charges during the Fiscal 2010 Quarter and Fiscal 2010 Six Months, in connection with the Ningbo Exit Plan. We have recorded pretax restructuring and related charges of approximately $30 million since the inception of the Ningbo Exit Plan.
During Fiscal 2009, we implemented a series of initiatives within the Global Batteries & Appliances segment, the Global Pet Supplies segment, and the Home and Garden Business segment to reduce operating costs as